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In 1999, I made a forward-thinking decision to divest from UK assets and shift focus to the US, foreseeing that US equities would outperform the UK market over the following decades.
Reflecting on this 25 years later, the underperformance of UK pensions and markets raises pertinent questions about why UK pension funds failed to adjust their strategies similarly and why domestic bias persisted, leading to substantial missed opportunities for pensioners and savers.
UK Pension Fund Underperformance
The poor returns of UK pensions have been driven by multiple factors, many of which reflect a structural conservatism. Historically, UK pension funds held significant portions of their assets in domestic equities. However, as highlighted in a recent report, allocations to UK stocks have now hit a historic low, with just 4.4% of UK pension assets held in domestic equities as of 2024.
This shift was largely driven by a series of regulatory changes and the de-risking of defined-benefit (DB) schemes, pushing pension funds towards bonds rather than equities.
The preference for bonds was reinforced by a focus on stability and liability matching, especially as DB schemes matured and began to wind down. As a result, while these funds secured some level of safety, they also missed out on the growth potential offered by equities, particularly in the booming US market.
Even though defined-contribution (DC) schemes, which are more growth-oriented, are now the fastest-growing area in the UK pension sector, their domestic bias persists. Only around 8% of these schemes' assets are allocated to UK stocks, and their performance lags behind other global peers.
Why Did UK Pension Funds Not Follow the US Example?
The fundamental question is why UK pension funds did not pivot sooner to growth opportunities in the US, as you did. The answer lies in a mix of regulatory inertia, cost concerns, and a preference for home-country bias. UK pension funds were pushed into "de-risking" strategies, which favoured bonds and safer investments over the long-term growth potential of equities.
This strategy may have been designed to secure short-term stability, but it overlooked the opportunities in higher-growth areas, such as US tech stocks, which performed remarkably well during this period.
Another contributing factor was the cost sensitivity of UK pension funds, which led them to avoid investing in equities, especially foreign ones, which may have been seen as more expensive due to exchange rate risk and additional transaction costs.
Moreover, political and regulatory frameworks incentivised investment in domestic markets, despite evidence that higher returns were being achieved elsewhere.
The Cost of Domestic Bias
The reluctance to embrace international equities, particularly the high-growth US market, has come at a substantial cost to UK pensioners and savers. As you noted, US stocks, especially in the tech sector, have outperformed UK equities significantly over the last two decades.
For instance, the S&P 500 has consistently outpaced the FTSE 100 in terms of total return, benefiting from high-growth companies like Apple, Microsoft, and Amazon. UK pensioners, by maintaining a domestic bias, missed out on these growth opportunities.
The true cost of this domestic bias is difficult to quantify precisely, but the scale of the underinvestment is clear. According to estimates, UK pension funds could have doubled their allocation to UK stocks and still remained within international norms.
Had they taken a more global approach and invested more heavily in US growth stocks, pensioners could have reaped far higher returns. Given the performance disparity between the US and UK markets, it’s plausible that this domestic bias has cost UK pensioners billions in lost potential gains.
A Path Forward
Looking ahead, there is increasing pressure on UK pension funds to reassess their strategies. There is debate within the UK government on whether pension schemes should have greater incentives or requirements to invest in British assets.
However, it is equally important for these funds to consider more globally diversified strategies to maximise returns for their beneficiaries. A shift towards US equities and other global growth markets, as you advocated in 1999, would benefit UK pensioners significantly.
In summary, the domestic bias that has characterised UK pension fund investments has been costly. Had they adopted a more international focus and allocated greater assets to high-growth US stocks earlier, UK pensioners would likely be in a stronger financial position today.
Going forward, pension funds need to rethink their allocation strategies to ensure they capture the best growth opportunities available globally, rather than remaining overly reliant on domestic markets.
My anger at UK pensioners being let down by Governments and fund managers led me to create my Campaign for a Million, to teach a million people, free, how to invest better and add an extra million across their lifetimes into their pensions – continuing the work I began in 1999.
Alpesh Patel OBE
Visit www.alpeshpatel.com/shares for more and see www.alpeshpatel.com/links
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