The government wants pension funds “to consider investing a greater proportion of their capital in long-term UK assets – from pioneering firms to infrastructure.” This is unwise.
Yes, there’s a germ of truth behind this desire. It’s possible that, over the long-term, unlisted companies will perform better than listed ones simply because many of the latter are fully-grown: many come to the stock market only after they’ve enjoyed their best growth. Identifying these good companies, however, requires a different skill-set from picking listed stocks – not least because it often involves more close and active involvement with management. It is a job that should be left to private equity and venture capital managers. Pension funds don’t have to do everything.
In fact, there’s a strong argument for pension funds not investing in the UK at all. There’s a danger that over the long-run the UK economy will perform worse than others. If so, young people investing in UK companies will suffer a double loss: poor returns on their investments as well as worsening job prospects. One way to mitigate this risk is to invest overseas, thereby having your financial capital in a different place to your human capital. In a classic paper, Marianne Baxter and Urban Jermann showed that workers should invest none of their money in their domestic economy. This shouldn’t be as a radical as it sounds. It’s just following the old advice to not put all your eggs in one basket.