The steady trickle of companies quitting London to seek a US listing has alarmed City commentators. Ireland’s CRH, the world’s biggest building materials supplier, is looking to shift its main listing to New York while Flutter, an international gambling group, is considering a secondary listing there. More worryingly, SoftBank, the Japanese owner of UK-based Arm, a leading chip design company, will list Arm’s shares in New York – despite months of ministerial lobbying in favour of London. SoftBank’s decision might have been painful, but it was also tough to argue with: shares in CRH jumped 11% on the morning it announced its plan.
After the failure to bring the Arm listing to London, unnamed government sources blamed the Financial Conduct Authority’s refusal to relax UK listing rules. Perhaps they have a point. But it is not clear that London-listed companies are leaving mainly because of regulation (although the UK’s attempts to address problem gambling may be a factor for Flutter). Instead, companies highlight the far larger quantities of equity capital available in the US.
What additional incentives and policy nudges do we need to make investing in UK-listed companies a more attractive proposition?
This seems a more compelling explanation, as does its flipside: that UK institutions are no longer reliable buyers of shares in UK companies. As Michael Tory of corporate advisory firm Ondra Partners told the Financial Times: “There are no domestic equity investors here – everything else is a symptom. It’s not about the listing rules, the governance or the free float requirements.”
The gradual disappearance of the UK’s pension funds from domestic shareholder registers has been going on for at least 20 years. According to March 2023 figures from the Office for National Statistics (ONS), UK pension funds owned just 1.8% of the UK’s listed equities in December 2020, while insurers held 2.5%. Non-UK owners had 56.3%. In 1998, according to the ONS, UK pension funds owned 21.7% of the market and insurance companies 21.6%. Non-UK entities had 30.7%.
This withdrawal reflects pension funds’ shifting asset allocation. Back in 2000, UK defined benefit pension schemes held 74% of their assets in equities (including 48% in UK shares), with the rest mainly in fixed income, cash and property, according to the Investment Association’s 2021–2022 annual survey. By the end of 2021, their allocation to equities had dropped to 19% and to UK equities it was just 2%. Bonds made up 72% of their portfolios on average.
Two simultaneous trends are playing out. The first is the end of ‘the cult of equity’, the seeds of which were sown in a 1956 speech by the late George Ross Goobey, manager of Imperial Tobacco’s pension scheme. He argued that instead of owning bonds, which then made up virtually the entire portfolio of most pension funds, trustees should invest in equities to generate superior after-inflation returns. His advice struck a chord and over the following decades, a huge shift occurred in pension funds’ asset mix from bonds to equities. Now, with almost all final salary pension schemes closed to new members and a growing percentage of their existing members in retirement, trustees – encouraged by regulation – have turned back towards bonds to generate the predictable income streams they need to guarantee people’s incomes in retirement. Equities are no longer a major consideration.
But wait a minute. It is not as if pensions have ceased to exist, just that final salary schemes are on the way out. Are we not forgetting the rollout of auto-enrolment into new, defined contribution workplace pensions since October 2012, widely hailed as a huge policy success? Surely the growing pot of pension savings in these new workplace schemes can start to fill the gap that final salary schemes are leaving behind.
Sadly not. And this highlights the second major trend that these data illustrate: pension funds have been globalising their equity allocations for decades, steadily eroding the share invested on the London market.
The UK’s largest manager of auto-enrolled workplace pensions, Nest (National Employment Savings Trust), had total assets under management of £26.8bn at the end of last year, according to its December 2022 investment report. Around 55% of Nest’s main 2040 Retirement Fund is allocated to equities, 49% tracking a FTSE All World (Developed Markets) index that excludes tobacco. The UK’s weighting in that benchmark index is around 5%. The US has a weighting of about 65%.
Even as contributions from millions of savers flow into the UK’s new retirement system and its assets under management expand to replace declining defined benefit schemes, there is no realistic prospect that vastly more money will find its way into UK-listed equities from this source. It is not just companies that are heading to the US. Major UK investors are too, and they have been for years.
Anyone that wants to see equity capital flow to UK-listed businesses, therefore, needs to find creative answers to two key questions: What additional incentives and policy nudges do we need to make investing in UK-listed companies a more attractive proposition? And which types of investor are most likely to respond to those incentives and open their wallets?