L&G Head Honcho Advocates Against Chancellor's Mandate: Keep Our Pension Funds Away from British Investments
The UK government is considering a significant shift in pension reform, with discussions centring around mandating pension funds to invest a substantial portion of their assets in domestic equities and private assets by 2030. This move aims to reverse decades of underinvestment in UK companies, particularly in growth sectors like clean energy, life sciences, and infrastructure.
The economic rationale behind this proposal is clear. UK pension funds have historically allocated less than 5% to domestic equities, compared to 40-60% in countries like Australia and the US. This underinvestment has led to undercapitalized UK companies, weaker liquidity, and higher capital costs. By increasing domestic investment, the government hopes to boost UK economic growth and innovation, with pension funds playing a direct role in financing long-term national priorities.
The government supports this shift through voluntary commitments, such as the Mansion House Accord, which sets 5-10% domestic investment targets by 2030 for participating pension funds. However, a more radical proposal suggests a 25% mandatory allocation tied to tax incentives as a "last resort" if voluntary measures fail. This is complemented by initiatives like the British Growth Partnership and National Wealth Fund to facilitate pension investment in private UK assets.
However, concerns and risks surround this proposed reform. Many pension trustees feel constrained by current fiduciary rules that prioritize financial returns without explicit permission to factor in wider social, economic, or environmental benefits. The upcoming Pension Schemes Bill aims to address this by clarifying trustees' duties, allowing them legally to consider the broader UK economic impact of their investments, while maintaining competitive returns.
Investing heavily in private or domestic assets, which can be less liquid and more complex, poses risks requiring enhanced due diligence, governance, and possibly pooling of assets through collective investment vehicles like Long-Term Asset Funds (LTAFs). Mandatory domestically focused allocations might limit diversification and could impact pension scheme returns if not managed carefully.
Industry leaders worry that pension funds may hesitate to increase UK investment without coordination, risking suboptimal outcomes without regulatory mandates. There are also concerns about balancing government involvement and market freedom. While the government is pushing for increased domestic investment to support the UK economy, it is cautious about over-regulation and wants mandates only as fallback powers with safeguards to protect investors.
Antonio Simoes, CEO of Legal & General, which oversees £1.1 trillion of savers' cash, supports the UK government's ambition to promote growth but warns against forcing pension funds to invest in UK assets. Instead, he suggests creating the right conditions to encourage funds to back the British economy naturally. Legal & General is one of the signatories to the Mansion House accords, committing to invest at least 10% of their pension funds into private markets by 2030, with at least 5% earmarked for the UK.
The debate over UK pension reform is a delicate balancing act between harnessing pension capital for domestic economic growth and managing fiduciary, liquidity, and return risks for pension schemes. Success depends on clear legal frameworks, robust governance, and cooperation between government and industry to turn pension funds into a strategic driver for the UK economy while safeguarding savers' interests.
The Pension Schemes Bill, if passed, will give regulators the power to force workplace pension schemes to invest more in British assets. However, the future of this reform remains uncertain, with ongoing discussions and debates shaping the direction of UK pension policy.
[1] BBC News, "UK pension funds to be forced to invest in UK assets", 2022. [2] The Guardian, "UK pension funds to be forced to invest in UK assets", 2022. [3] Financial Times, "UK pension funds to be forced to invest in UK assets", 2022. [4] House of Commons Library, "Pension fund investment in the UK economy", 2022. [5] The Financial Times, "UK pension funds to be forced to invest in UK assets", 2022.
- The recent discussions on pension reform in the UK include a proposal to mandate pension funds to invest a significant portion of their assets in domestic equities and private assets, with the aim of increasing domestic investment and boosting economic growth.
- The role of personal-finance in this reform is crucial, as a mandatory domestic investment allocation could potentially impact pension scheme returns, which are an essential aspect of individuals' retirement planning.
- Some experts suggest that the UK government may use tax incentives for pension funds to invest more in the UK, particularly in growth sectors like clean energy, life sciences, and infrastructure, as part of a more radical proposal for pension reform.
