The new government needs to stem the flow of UK pension investment into US tech stocks and the ‘Magnificent Seven’ to boost domestic growth, New Capital Consensus has argued.

The think tank’s report, Diversifying Investment Flows, warned that national savings were being systematically channelled into overseas, primarily US-based, securities and “unproductive” secondary markets, at the expense of domestic investment.

It highlighted that, as an example, if a UK defined contribution (DC) pension scheme was invested in the MSCI World Index, it routed more money into Apple (5.5 per cent) than the whole of the UK economy (3.8 per cent).

New Capital Consensus said the UK’s private investment capital was being caught in an “overseas leak”, whereby savings were funnelled into US tech-dominated indices.

The domination of the Magnificent Seven, which accounted for 22.4 per cent of the global index, was creating a systemic risk for UK pension savers while reducing the investment needed for the UK economy to grow, the think tank warned.

“The recent SpaceX IPO has highlighted the fact that index composition is now essentially setting UK retirement policy for UK savers,” commented New Capital Consensus policy director, Dan Hedley.

“Nasdaq’s fast-entry rule pulled SpaceX into the index before the market had time to price it properly, and the mechanical consequence of how our DC pensions are invested is that roughly $17.7bn of passive investment will be conscripted into the IPO without pensioners knowledge.

“The US already massively outweighs the UK in these indices. With $4tn worth of new US-tech IPOs coming down the pipeline, this is likely to get even worse.”

Hedley said the UK’s capital flight was not just a matter of global diversification; it was actively damaging the country’s own innovative ecosystem.

“Our report highlights how high US valuations, fuelled by passive index flows, enable US firms to buy up fledgling UK businesses before they can scale,” he added.

Additionally, the report found that between 60 per cent and 70 per cent of equity market volume was now algorithmic secondary trading, which it said provided a market function of price discovery but did not reach the balance sheets of real-economy firms.

The primary policy recommendation included in the report was the introduction of tax disincentives aimed at out-incentivising passive indexing.

This would include a 10 per cent DC exit tax on accumulated gains for funds that fail to maintain a 30 per cent allocation to UK productive assets, alongside dividend tax relief for funds that hold at least 10 per cent in UK regional productive assets.

The think tank argued that while tax was the strongest lever to incentivise domestic re-allocation, other options such as disclosure and mandate reform were needed to break inertia.

“This is not about ‘domesticating UK money,’ it is more about ‘stop sending all our money to the US and not concentrating it in seven high-risk US tech giants’,” said New Capital Consensus director, Ashok Gupta.

“UK savers want to see their money improving the areas they will most likely retire in, but this just isn’t happening. If the new administration wants to get to grips with regional development and get our economy growing again, it must address both US-dominated overseas flows and unproductive secondary trading.

“We believe that can be achieved in-part through tax disincentives. But the system requires multiple redesign principles that perform in concert, including rethinking benchmark construction, changing how funds are automatically invested by default, and greater transparency over how and where our pensions are invested. The report outlines how they can start to do that.”

---