How patriotic should our pensions be?
The notion of unleashing a £100bn ‘stock market boom’ by compelling pension funds to invest more heavily in UK companies has sparked intense debate. This is the proposal tabled by 250 UK company chiefs who want the chancellor to mandate schemes to put 25% of assets in UK firms, in a bid to kick-start the economy.
For a government which is understandably keen to revive the domestic economy, it looks like an easy win: unlock pension capital, lift share prices, and declare a new era of growth. But the real question is whether such a move would serve the people whose savings underpin these funds – the millions of defined contribution (DC) members entrusting their futures to the system.
Business leaders call for DC defaults to be forced to buy UK
Last month, senior executives called for chancellor Rachel Reeves to “condition the privileges that are granted to UK DC pension scheme default funds upon them allocating a minimum 25% of their default fund assets to UK investments – across each asset class”. Read the full story.
The importance of fiduciary duty
The temptation to align pension assets with national economic policy is understandable. UK companies need investment and pension funds hold vast pools of capital. However, those funds exist for one purpose only: to deliver the best possible long-term outcomes for savers.
“If government pressure leads schemes to concentrate too heavily in the UK market, fiduciary duty risks being compromised.”
Louise Farrand, DC Investment Forum
Trustees and asset managers have a fiduciary duty to act in members’ interests, not as instruments of industrial policy. If government pressure leads schemes to concentrate too heavily in the UK market, that duty risks being compromised.
Diversification is one of the fundamental principles of long-term investing. DC members already face numerous risks: market fluctuations, inflation, and the challenge of converting savings into income. Spreading investments across geographies and sectors helps to manage those risks. Forcing funds to invest disproportionately in UK companies would make them more vulnerable to domestic downturns and political uncertainty.
Moreover, through initiatives like the Mansion House Accord, providers have already voluntarily committed to investing in private markets and backing UK growth – our sector is already stepping up. Members of the DC Investment Forum are keen to work with the rest of the industry to identify the most appropriate opportunities for DC savers.
Finally, we must also consider the risk of short-term distortion. Injecting £100bn of pension money into UK equities could inflate valuations and generate a temporary feel-good rally, but the effect might not last. Once prices are pushed beyond fundamentals, expected returns fall - meaning today’s boom could become tomorrow’s disappointment for pension savers. Political success stories do not always translate into investment success stories.
Improve the investment pipeline
If Rachel Reeves is looking to mobilise pension capital for national growth, she would do better to create the conditions that naturally attract investment rather than mandate it.
“Economic growth and pension performance can align, but only if the policies that connect them respect the integrity of long-term investment.”
Louise Farrand, DC Investment Forum
Simplifying regulation, improving the quality and governance of UK growth companies, and encouraging innovation would make domestic assets genuinely appealing to investors on their own merits. Incentives, co-investment vehicles, and patient capital partnerships could all help to channel money into productive UK projects without undermining fiduciary independence.
Pension funds can and should play a constructive role in supporting the UK economy, but not at the expense of their members’ financial security. An investment strategy must be designed for savers first and foremost. Economic growth and pension performance can align, but only if the policies that connect them respect the integrity of long-term investment.
So, should DC investors bail out Rachel Reeves by injecting growth into the UK economy? Not if it means sacrificing member outcomes for political convenience. Building Britain’s prosperity is important, but it must not come at the cost of well-balanced portfolios that can finance the future for DC savers.
Louise Farrand is executive director at the DC Investment Forum.
