The government has made no secret of its desire to use pensions to boost the economy. The problem, as the government sees it, is that British pension funds are not investing the amounts that they could in UK assets. In fact, we have the lowest investment rate in the G7 – quite an achievement for a country with £3 trillion in pension accounts.
It wasn’t always like this. UK pension schemes have dropped their UK equity exposure from about 50 per cent to 4 per cent over the course of this century. The London Stock Exchange Group says the reduction can be attributed partly to liability-driven investing, where investment assets in defined benefit schemes are matched to future pension payouts. Accountancy and regulatory changes have also played a part.
And the trend may not be fully played out, with more reductions to come. Scottish Widows announced in June 2025 it was reducing its allocation to UK equities in the interest of offering a “more globally diversified approach” to capture “more growth opportunities in high-performing international markets”.
The government is legislating to reserve the power to mandate pensions to invest in the UK. But it would rather not force the issue. So, it’s secured a voluntary commitment from 17 defined contribution pension providers to allocate 5 per cent of their main default funds to UK private markets by 2030.
What’s also standing in the government’s way is the behaviour of pension trustees. Ultimately, the decision over investment offerings to members lies with the trustees. They have a fundamental duty to act in members’ interests. That requires impartiality and the need to balance the needs of all members – current, future and their dependants.
However, the government and campaigning organisations such as ShareAction, believe the current law on pension scheme trustees’ fiduciary duties is not clear. This makes it hard for pension schemes to be confident they have a legal basis for looking at investment issues that can have wider impacts on their members, such as investing in the UK economy, health and the environment.
An amendment to the Pension Schemes Bill currently going through Parliament aims to bring that clarification to trustees’ fiduciary duties. The rhetoric surrounding this amendment to Clause 17 is ‘working people should be able to use their savings to build a richer and stronger country into which to retire’.
By ‘richer and stronger’ MPs mean investment into net zero, affordable homes, affordable transport systems, cleaner power and social care. It’s the idea of pension investments having a double duty – not only to provide for their members’ retirements, but also to build the country.
Is it really in the interests of DC scheme members for their funds to proactively support their domestic economy?
Yes, there’s something comforting about having exposure to your home economy – a bit of home bias.
It’s also easier, and more logical, to argue for a low exposure to the UK.
The UK’s share of global GDP is now only 2-3 per cent, depending on which research outfit you rely on. If you’re investing in a global tracker fund, which many investors are, then the UK exposure is small. The MSCI World Index, which gives exposure to developed economies only has a 3.58 per cent exposure to the UK.
If the jobs of members are linked to the UK economy, should their pensions be too? It’s similar to having a DB pension fund reliant on a struggling employer. It could be a good reason to transfer your money out.
Why should the pension contributions
of someone in a DC scheme be directed
towards the UK if there are better opportunities abroad?
Most of us just want to scrape together a decent pension pot. We’ve seen the most extraordinary returns from US tech stocks and gold this year. What right does a government or a trustee really have to take those returns from future pensioners?
More fundamentally, should the government not direct the pension contributions of public sector DB schemes first, before asking the private sector? A very sensible way to trial and test its ideas would be to start with MPs’ and civil servants’ pensions.
The UK’s Parliamentary Contributory Pension Fund is substantial – at over £10 billion in assets. But, you’ve guessed it, the fund has a paltry allocation to UK equities.
If MPs prioritised UK equities and private assets for their own pensions, it would be an excellent way to demonstrate commitment to accelerating UK growth. Experimenting on their own generous retirement provisions first would be an honourable way to proceed, before imposing this trial on the general public. That’s what I call true fiduciary duty.
