Speaker 0:
joining me here we have Simon, French, chief economist at Gordon Simon. Thanks very much for being here. Always a pleasure. I want to start with a lot of criticism at the moment about UK pensions in particular, that they're quite risk averse and that perhaps they're not investing in the kind of growth areas that maybe other pensions do.

Speaker 1:
It's an area of huge debate, and you're right to focus on it because the result of a

Speaker 1:
30 30 year plus bull market in fixed income means that and increased longevity means the pension funds have seen those returns from fixed income, seen the extended longevity and have allocated as a if you like an echo of those structural factors more towards fixed income and less towards not just equities and risky assets, but specifically UK equities and UK risky assets.

Speaker 1:
And at a time when UK economic growth UK productivity is in the headlines almost daily because of its underperformance, it is natural that we're trying to establish the causal link between the two

Speaker 0:
and I. I wanna get this right. So the proportion of all UK pension finance invest in equities was 26.4% in 2021 which is down from 55.7 in 2000. And one is that quite a staggering statistic.

Speaker 1:
It's not just a staggering statistic in terms of those correct data points, but it's also staggering in terms of what may be still to come in terms of further reduced allocation. Because it is right,

Speaker 1:
the pension funds must must match up their liabilities and their assets in terms of duration. And clearly there are more obvious long term fixed, you know, duration assets out there in the fixed income market. And so you can understand from a investment advisor standpoint, trying to, uh, recommend the pension funds follow the liabilities with the asset base that they've gone down this route.

Speaker 1:
But clearly the second order effects, which are not the fiduciary duty of pension funds but are of wider relevance to the economy and the overall size of not just the UK economy but the world economy. If there is an under allocation to risky assets growth assets, we must look at them in the same light. Then that could have unintended consequences which are

Speaker 1:
socially distributed rather than individually distributed to that pension fund

Speaker 0:
a lot of this. They say go back to Robert Maxwell and a lot of the stuff that happened around there Did the regulators perhaps go a bit too far when they were changing the laws and regulation?

Speaker 1:
Well, certainly when you look at the ring fencing of of assets that took place post the the Maxwell Mirror Mirror Group, you know, what was a pension fund raid to prop up the underlying business? There were some very well meaning and, uh, well intentioned regulatory changes. And I don't think anybody would look back at that period and say that they weren't,

Speaker 1:
um, appropriate for the Let's call it for what It was the fraud that took place. But are there always an almost always unintended consequences of regulatory moves? I think there are all there are, because when you're trying to address a singular problem,

Speaker 1:
will there be an allocation problem that has, uh, or an allocation, uh, reaction that has unintended consequences in terms of growth in terms of backing,

Speaker 1:
uh, businesses backing risk capital, the type of things that you would not have wanted regulators to have their consequence upon. That's absolutely the legacy of an event that happened more than 30 years ago.

Speaker 0:
There was a lot of praise for for Canada, for Scandinavian countries and Australia for the way in which their pensions work and the way in which that they manage long term, riskier assets. Do you think the UK could learn perhaps a few lessons? Uh,

Speaker 1:
definitely. I think if you look at the way, particularly the one I'm most familiar with is probably the Australian superannuation scheme and the way in which particularly they have, um, engaged with the end saver, the end of, um on

Speaker 1:
educating and and making sure there is informed choice on how people are saving for retirement. Um, I think we do have in the UK a quite a long dated legacy of a lack of financial knowledge, a lack of being able to be be informed in terms of the choices you're making for retirement. And if you outsource that entirely to an advisor and then the advisor looks at the returns that we spoke about the start of this interview that have come from fixed income,

Speaker 1:
you can't be overly surprised if the ultimate reaction further down the line is to be very, very risk averse to pick a guaranteed coupon rather than one that is subject to a higher level of variance. And potentially, the economic outcome is a direct function of that lack of, uh, education and, uh, and information.

Speaker 1:
I will leave you, perhaps on a positive note, which is we have been through a pensions revolution in the United Kingdom in the last 10 years. Through auto enrollment into workplace pensions, you have seen the increase of workplace pension membership from less than 50% to more than 75%. That brings pensioners in or and future pensioners into scope of being vested

Speaker 1:
agents in the growth of the economy in the fact that earlier on, in their cruel phase, they want to be exposed to riskier and higher growth assets. And I hope that that will have a legacy in terms of both the engagement, the education and then, ultimately, the risk allocation of pension funds because of

Speaker 1:
greater societal engagement with the pension schemes. One

Speaker 0:
thing I wanted to finish on, perhaps looking at it from a slightly different angle, but with trillions in UK pensions. And a lot of the article that was written is about investing all that trillions into these growth areas. Is it really the job of DB and DC schemes to invest in these companies?

Speaker 1:
Well, I'm slightly conflicted on this. So from an economist standpoint,

Speaker 1:
I would say it isn't the job of a government or a regulator to start providing overarching guidance, particularly towards, um, reinforcing what is a long dated home bias In terms of the allocation of UK pension funds towards UK assets, the UK economy is 3% of global GDP. They still allocate far more to UK assets than 3%. So there is a very obvious home bias in terms of allocation.

Speaker 1:
But and all the economic financial market debates have two sides to these, uh, these arguments there is a, uh, a pot of capital there which, in an environment where large infrastructure, large growth projects are seemingly underfunded, underresourced undervalued.

Speaker 1:
Is there a what behavioural economists would call a nudge there? Uh um a liberal, paternalistic responsibility, A bit of a mouthful, But it's a responsibility to say, right, here's a market failure. We're coming in to address that. I think such is the state of UK valuations and under investments in, uh, the capital stock that actually, that argument is growing stronger and stronger almost by the day.

Speaker 0:
Simon. That's a perfect point to leave on. Thank you very much. My pleasure.