Pension funds’ shift away from investing in domestic equities and companies has contributed to the decline of small businesses in the UK, research from Abrdn has suggested, prompting calls policy changes.

The Future of Smaller Company Capital Markets in the UK report, launched by New Financial in partnership with abrdn, revealed a 31 per cent decline in the number of smaller listed companies with a market capitalisation of less than £1bn, which translates to the loss of 600 companies.

According to the report, a major factor contributing to the decline is the drop in demand from UK pensions, as only one Local Government Pension Scheme had a specific allocation to UK smaller companies, compared to 18 schemes in 2013.

In addition to this, Abrdn found that pension funds have reduced their allocation to UK listed equities and shifted toward global market weight allocations, with allocations to UK listed equities falling from 40 per cent to less than five per cent over the past 20 years.

This trend has been largely driven by the effective closure of many corporate DB schemes over the past 20 years, along with a focus on low costs in DC pensions, which has caused most equity allocation to be directed into global passive funds.

In light of the findings, abrdn has called for the Masion House Compact to be extended to include small caps in the UK as well as with infrastructure, real estate and private debt.

It suggested that big pension fund providers who have signed up to the Mansion House Compact, under which they have pledged to invest five per cent of their default funds in unlisted equity, allocate at least a portion of this investment to AIM and Aquis stocks.

Abrdn also said that measures to boost investment in the UK more generally are much needed and would support small cap companies by increasing capital flows as a whole.

Therefore, it recommended a significant increase in minimum pension contributions via auto-enrolment.

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