The document provides an overview of how regulations in the UK pension industry have become more stringent and risk-averse since the Robert Maxwell scandal in the early 1990s. Key points: - Maxwell's fraudulent appropriation of £460m from the Mirror Group's pension fund to prop up his companies led to major increases in regulation of UK pension funds. - Over time, rules reduced pension funds' exposure to stocks and early-stage companies, instead pushing more investments into lower-return government and corporate bonds. - Critics argue this overly cautious approach has hurt the UK economy by limiting investment in growth areas and contributing to the decline of UK stock ownership. - Industry leaders are now calling for reforms that provide

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hen the body of newspaper tycoon Robert Maxwell was found floating in waters off the Canary Islands in November 1991,
his mysterious death brought down his family’s media empire. In the weeks and months that followed, it also spelled the
end of an era for UK pensions.
After the 68-year-old died, it transpired that £460m had been fraudulently appropriated from the Mirror Group’s pension fund to
prop up Maxwell’s debt-laden companies.
Pension fund investments in London
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2. The criminal revelations helped to drive a massive increase in red tape in the retirement industry during the 1990s, making funds
more risk-averse and reducing their exposure to the stock market and early-stage companies.
Well-intentioned rules now govern every aspect of how savers’ money is invested, from strict accounting regulations to limits on
the kinds of assets that can be held.
The result, say critics, has been economic stagnation and foreign ownership of some of Britain’s best companies, punctuated by a
steady drumbeat of pension scandals – from British Steel to BHS – that no crackdown has been able to prevent.
On the upside, the industry is waiting to deploy billions of pounds of capital. Reform could unlock a wave of investment by a £4.6
trillion industry – and help turbocharge the British economy as it struggles out of crisis.
Michael Eakins, chief investment officer at FTSE 100 pensions business Phoenix Group, says axing red tape will create an
environment where new companies can be “founded in the UK, developed in the UK and listed in the UK”, boosting the economy
and creating jobs in the process.
Eakins adds that the Maxwell saga “led to much more control in terms of what pension funds could invest in”.
“Over the last two to three decades, there has been a consistent and persistent de-equitisation of UK pension funds and insurers
and it absolutely is a concern,” he adds.
“That concern is manifesting itself in terms of the impact on the UK economy and the standing of the UK economy as a place where
companies want to come, start themselves up and evolve.”
The data speaks for itself. Between 1997 and 2021, UK pension funds cut their exposure to UK shares from 53pc to just 6pc,
according to a recent report by think tank New Financial. And since the turn of the century, the share of the UK stock market owned
by UK pensions and insurance companies also collapsed from 39pc to 4pc.
Nigel Wilson, chief executive of Legal & General (L&G), the UK’s biggest pensions manager, blames the de-equitisation drive on
new accounting rules introduced in the wake of Maxwell’s death and Gordon Brown’s decision to charge higher taxes on dividends.
In 2000, a new accounting standard known as FRS17 obliged companies to report the market value of their pension funds on their
balance sheet.
Startled by the size of pension liabilities being booked, company boards rushed to shut many defined benefit, or final-salary,
schemes and shifted their investment strategies away from stocks and into lower-return, lower-risk government and corporate
bonds.
The New Financial report shows that UK pension funds have quadrupled their allocation to bonds to 56pc over the last 25 years.
The shift into bonds heralded a new era of “liability-driven” investing (LDI), which was regarded as a safe and fool-proof strategy
until Kwasi Kwarteng’s ill-fated “mini-Budget” last year caused debt prices to plummet, leaving some retirement schemes on the
brink of collapse.
Meanwhile, in Brown’s first budget in July 1997, the then Labour chancellor staged a raid on pension schemes by axing dividend tax
credits of 20pc to which they were previously entitled.
“Those events collectively really reduced the risk appetite and increased the regulatory oversight on the UK pension industry in a
fairly profound way,” says Wilson.
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3. Hendrik du Toit, chief executive of FTSE 250 asset manager Ninety One, concurs, adding that the UK has done itself a disservice by
adding more regulation on top of EU rules – such as a new duty to protect consumers – as well as shunning investment risk.
New rules introducted following the Maxwell scandal
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4. Not every country has adopted the UK’s more conservative approach. Canadian and Australian funds have been given more
freedom by their home regulators to invest in higher risk asset classes such as listed and early-stage companies, venture capital and
private equity.
The results have, on the whole, been positive. Ontario Teachers’ Pension Plan (OTPP), a defined-benefit scheme run for more than
330,000 public teachers, last year made a 4pc gain on its investment despite turmoil in global markets.
Wilson says: “Australia and Canada have been ahead of us for a long period of time, while the US has a very equity driven culture.
“We became obsessed with housing [as an asset] in the '60s and '70s and somehow viewed house price inflation as a good thing.
But we never created that equity culture. So we made housing sexy but we made pensions dull.”
He also bemoans a certain sense of inertia in Britain towards saving and investing, noting that out of L&G’s near-five million
defined contribution customers, only about 1,000 change their portfolios each month.
Both Wilson and Eakins are calling for a cultural shift to embrace greater risk in the UK pensions industry.
Among reforms they are hoping to see include giving pension funds a “soft” mandate to invest a certain percentage of their capital
in growth equity and infrastructure, as well as exclude performance fees from a cap on pension charges.
Phoenix’s Eakins says: “The charge cap means you can’t invest in strategies that have an element of performance related fees. That
prevents savings and retirement providers such as Phoenix from investing in asset classes like venture capital or early stage growth
capital.
“If you’re taking a multiple decade time horizon, having an allocation to venture capital and private equity is absolutely appropriate.
These asset classes have a demonstrable track record of paying supernormal returns over the long term. But the current regulatory
regime has prevented us from getting that access.”
Jeremy Hunt, the Chancellor, has not ruled out telling funds where they should invest some of their capital, but has said he is not
“instinctively comfortable” with the idea. And not everyone in the industry is keen on it either.
Morten Nilsson, chief executive of the BT Pension Scheme (BTPS), one of the UK’s largest private sector retirement schemes which
recently rebranded as Brightwell, says: “Pension schemes need to be able to have the freedom to invest in the very best way to
meet the needs of scheme members.
“Trustees have a duty to members and need to select the most appropriate investments regardless of geography.”
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Hunt is preparing to make an announcement on pension reforms by the autumn, which is likely to include plans to consolidate the
fragmented industry, bringing it more in line with the likes of Canada.
Nilsson says the sector is ripe for dealmaking, adding: “There would be a number of advantages to having a smaller number of
larger funds. Larger funds have more buying power, greater expertise and can often take more risk.”
The Chancellor is understood to be increasingly focused on the UK’s 28,000 defined-contribution schemes, where retirement
returns for customers depend on the performance of the scheme’s investments.
Experts argue that the demise of the UK’s markets is inextricably linked to its inability to benefit from its sizable pensions industry.
London has struggled to retain tech darlings like Cambridge microchip designer Arm, which announced earlier this year that it
would snub the London Stock Exchange in favour of New York.
Wilson, who has been tasked by the Capital Markets Industry Taskforce to lead a report into how to make London more globally
competitive, says: “We missed the technology bubble in 2000 when a lot of the great companies of today were formed and have
scaled up. America has ended up with a huge amount of scaled up businesses and we haven’t had any.
“We have so many startups – the degree of entrepreneurship in our universities is off the scale. However, we haven’t got a capital
system that is set up for these people to become successful in the way that the United States has.”
Wilson concludes that Britain needs to be more ambitious and set its sights higher than being more attractive than the European
Union.
He says: “Being better than Europe should not be the benchmark. There isn’t a European capital market equivalent to New York or
London or Hong Kong, so we’ve got to make [the system] function much better.
“We have to compete on a global level and the UK and London are falling behind.”
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Public sector net
borrowing (excluding
public sector banks) was
£25.6 billion in April 2023.
The second highest April
borrowing since records
began, largely due to:
the cost of energy
support schemes
increased benefit
payments
debt interest
ons.gov.uk/economy/gove
rn…
Office for Nati…
@ONS · Follow
Public sector debt excluding public
sector banks was £2,536.9 billion
at the end of April 2023.
Around 99.2% of gross domestic
product, with the debt-to-GDP
ratio at levels last seen in the early
1960s.
ons.gov.uk/economy/govern…
7:01 AM · May 23, 2023
18 Reply Share
Read 3 replies
Office for Nati…
@ONS · Follow
Public sector net
borrowing (excluding
public sector banks) was
£25.6 billion in April 2023.
The second highest April
borrowing since records
began, largely due to:
the cost of energy
support schemes
increased benefit
payments
debt interest
ons.gov.uk/economy/gove
rn…
7:01 AM · May 23, 2023
Read the full conversation
on Twitter
27 Reply Share
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