Spring Budget 2024—an opportunity missed?

The Spring Budget never fails to give us pause for thought—although, really, is it any wonder? By covering so much in such a short space of time, the Budget naturally invites more questions than it can duly answer.

Fleeting references made to the UK pensions market this year illustrate the point beautifully. So much was said, and yet so much was left unsaid, in just two short paragraphs: 

"I remain concerned that other markets, such as Australia, generate better returns for pension savers, with more effective investment strategies and more investment in high-quality domestic growth stocks…

So I will introduce new requirements for defined contribution (DC) and local government pension funds to disclose, publicly, their level of international and UK equity investments. I will then consider what further action should be taken, if we are not on a positive trajectory towards international best practice."¹  

In this blog post, we unpack the above, filling in the details as one of the UK’s leading investment-led master trusts. 

Does Australia really generate better returns for pension savers?

We’ll readily admit—this caught us off guard, not least because UK workplace pensions are actually doing remarkably well in this respect. 

The table below compares: 

• The returns generated by an index of 50 Australian superannuation growth options (the SR50 Growth (77-90) Index)²
• The returns generated by an index tracking the average return of more than 95% of the entire UK master trust market, as well as those of key life insurers active in the provision of workplace pensions (the Corporate Adviser Pensions Average (CAPA) Index)³
• The returns generated in the growth phase of retirement saving by the SEI Master Trust Flexi Default strategy (because we're nothing if not modest!)⁴

The UK and Australia generate a similar return in the growth phase of retirement saving

Source: SEI, as at 31 December 2023, using data from Corporate Advisor and SuperRatings (part of the Lonsec Group). Annualised returns are shown net of fees, and calculated using the base currency, for one-, three- and five-year periods. We have drawn a comparison between these three options because they share a long-term investment horizon and focus on capital appreciation. 

What’s obvious is that across all three comparison periods, the UK’s performance is on par with Australia. Over a 5-year period, the SEI Master Trust performs better still, returning 11.4% to the 8.6% generated by the UK and Australia. 

Interestingly, Australia’s superannuation funds invest globally – they have to, the Australian market is small. The funds also prefer infrastructure as a means to gain exposure to illiquid assets, rather than private equity. This, again, is to do with market size (it is widely acknowledge that there are more opportunities in infrastructure, than there are private equity)⁵.

Is mandating investment in UK equities the right approach?

Let’s now address the second part of the Chancellor’s statement. By asking DC and local government trustees to disclose their investment in UK equities, what the Chancellor is really inferring is that DC and local government trustees invest more in UK equities. This isn’t any great surprise—last year, the Chancellor spoke extensively about increasing UK pension scheme investment in ‘productive finance’.^6,7

The UK economy’s slow growth is, indeed, a problem—but it’s not necessarily a problem for UK pension schemes to solve. After all, a trustee’s number one priority is their scheme’s members—that’s where their fiduciary responsibility lies. 

In itself, encouraging investment in UK illiquid assets is also a little troubling. We’ve been successfully running illiquid funds for two decades, using them in portfolios for defined benefit (DB) schemes, endowments and charities alike—both here, and overseas. What we’ve learnt is that it’s wise to take a global approach, seeking diversification across asset type. Think about it: investing in UK private equity alone precludes wider opportunities in UK infrastructure and credit.⁸

And then there are the global opportunities a scheme would miss out on. Although past performance isn’t necessarily an indication of future success, if we want to understand why UK workplace pensions are underweight to UK equities more generally, then the liquid markets provide something of an answer. Taking the FTSE All-Share Index—a market capitalisation-weighted index comprised of around 600 UK stocks—the cumulative return over the last ten years stands at 63% (as at 31 December 2023).⁹ Investing globally, by way of the MSCI World Index would have produced a cumulative return of 215% for the same period (net of withholdings tax).¹⁰ There’s no two ways about it, that’s a big difference. Whether the market is liquid or illiquid, we believe taking a global approach provides access to more opportunities. 
 

What might an influx of investment mean for UK private markets? 

Aside from potentially clashing with a trustee’s legal obligations—and limiting the number of opportunities a scheme has exposure to—herding assets into a market with limited capacity, over a short period of time, could have nasty consequences. Put simply, the assets held by UK workplace pension schemes far outstrip the capacity of UK private markets. If these schemes set about chasing that limited capacity, two things would most likely happen: the market would become oversaturated, and an investment premium would be created. This, in turn, could mean money is either left unallocated, or that it is allocated to opportunities that are lower quality. Neither scenario leads to better member outcomes, which should sound alarm bells for trustees up and down the country. 

What next?

If references made to the UK pensions market in this year’s Budget were somewhat ill-conceived, and if the ability to override a trustee’s fiduciary duty in order to mandate a UK investment bias is difficult to legislate, then what does it matter? Why bring any of this up in the first place? 

We believe this year’s Budget represents a missed opportunity. Pensions legislation in the UK today does not require working people to save adequately for retirement, and, in this respect, mandating investment into any one asset class misses the point. Such an investment won’t miraculously provide a retirement income to those who are currently saving too little—only higher contributions can do this. In other words, there is no silver bullet. If we want to meaningfully change retirement outcomes for today’s working population, then we need to increase the minimum mandatory contribution levels for individuals and their employers. 
 

¹Her Majesty’s Treasury, ‘Spring Budget 2024 speech’, 6 March 2024.

² SuperRatings, ‘Media release: Super funds sail through the storm in 2023’, The Lonsec Group, 9 February 2024. 

³ CapaData, ‘Risk/Return – younger saver, 30 years from retirement, 1-year, 3-year, 5-year annualised’, Corporate Adviser, Q4 2023.

⁴ More information regarding the performance of our master trust is available on request.

⁵ For more information on Australia’s superannuation funds, including fund-level statistics, see The Australian Prudential Regulation Authority (APRA), ‘Statistical Publications’. 

⁶ For example, in his Mansion House speech and Autumn Statement.

⁷ According to the Bank of England, “Investment in productive finance refers to investment that expands productive capacity, furthers sustainable growth and… make(s) an important contribution to the real economy”. See Her Majesty’s Treasury, ‘Bank of England and Financial Conduct Authority convene working group to facilitate investment in productive finance’, Bank of England, 20 November 2020.

⁸ Whilst the Mansion House Reforms encompass a broader range of investments, the government have arguably placed greater emphasis on private equity than anything else.

⁹ Source: SEI, Lipper. Cumulative returns are calculated in GBP, for the 10-year period to 31 December 2023.

¹⁰Source: SEI, Lipper (as above).

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