Investing pensions in the UK economy
Jim Osborne calls attention to the UK Government’s proposal to compel pension companies to invest into the UK economy - that plan that could support the economy by at least several tens of billions of pounds.
Successive UK governments over the last 10 years have been trying to get UK pension funds to invest more in the UK economy. In 2023 these endeavours resulted in the “Mansion House Compact”, a voluntary agreement by 11 large Defined Contribution (DC) workplace pension providers to commit 5% of their default funds (off the shelf, standard offerings to savers) to invest in “unlisted companies”, i.e. property, infrastructure and private equity. In 2025 this voluntary commitment has been extended to 17 large DC pension providers with a commitment, in the form of the “Mansion House Accord”, to invest 10%, of which 5% is to be ringfenced for UK investment. The UK government and the DC pension industry expect that this will release £25 billion of investment into the UK economy by 2030.
The government has included provisions in the Pension Schemes Bill, currently going through Parliament, to compel investment in the UK if the targets set out in the Accord are not met.
Whilst this marks a potentially significant step forward there a reasons to remain sceptical about the impact of all this and to view the public statements by the Labour Government and the pension industry as overblown hype.
For a start the pension fund assets covered by the Accord come to £252bn. The expectation of £25bn investment by 2030 represents 10%; 5% would be £12.5bn. There will be growth in these funds over the next 5 years as a result of growth in contributions income, investment returns and measures in the Bill to promote consolidation of small funds into the larger ones. However, it does seem a stretch to expect the 17 funds’ value to double to £500bn by 2030. The longer term expectation is for the investments to grow to £50bn, which implies total assets in the funds will have grown by an unspecified date to £1 trillion.
The scale of the investment also needs to be put into perspective; as a proportion of UK GDP the amounts are trivial. £25bn over 5 years is an average of £5bn per year in the context of UK GDP being £3tr; 0.17% of UK annual GDP. There is potential, given that the total assets managed by all the pension funds in the UK amount to at least £3tr, for them to invest more in the UK economy but if they are reluctant to do so there is nothing to prevent the UK government itself from investing much more in the UK economy, using it’s capacity as the monopoly issuer of its own currency – the pound.
Given the emphasis in the Accord, and the UK government strategy, on promoting investment in “private markets” there is also a question mark about where those funds will be allocated. “Investment in the UK” does not necessarily mean investment in UK owned property, infrastructure and private equity. It is possible, even highly likely, that the funds will be invested with asset managers and private equity companies based abroad, particularly in the US. The UK economy is already highly penetrated by huge US private equity firms such as KKR and Blackstone, and asset managers such as Blackrock and Vanguard. KKR were recently associated with a potential takeover of Thames Water.
Many UK pension funds already invest heavily in US stocks such as the big US tech companies who also dominate in the UK economy. Effectively this means that our pension funds are complicit in wealth extraction from the UK economy by overseas corporations. Whilst pension fund trustees and managers might see the returns from these investments as being positive for their asset portfolio values, they ignore the drain on the UK economy which foreign investment creates through the off-shoring of profits, often to tax havens.
This is a strong reason for reforming the law of fiduciary duty to provide pension trustees, managers and advisors scope to consider wider and longer term socio-economic impacts of their investment decisions. Whilst investing in a US owned private equity entity, which is building new infrastructure in the UK, may seem like a positive contribution to the UK economy and add value to pension funds, the longer term impacts of foreign domination of the economy need to be considered. More investment needs to be allocated to companies domiciled in the UK so that profits and tax revenues are retained in the UK. Economic resilience is a vital element of future prosperity. Angus Hanton’s book “Vassal State” provides a vivid account of how the UK economy has become heavily dependent on large US multi-national corporations. This needs to change and pension fund investments need to help drive that change.
An initiative is being taken, involving industry bodies and campaign groups such as Share Action, to amend the Pensions Scheme Bill at its 2nd reading in July. The amendment proposes changes to the law of fiduciary duty to provide greater scope for pension trustees and managers (including the Pension Committees who are responsible for local authority pension funds), to consider the longer term socio-economic impacts of investments. The briefing provided by Share Action on the objectives of the amendment can be read by clicking the button below
Such a change in the law of fiduciary duty will allow Scotland’s local authority pension funds (the 11 LGPS funds) to consider investments which will create stronger local infrastructure, such as housing and energy, promote food production and, more widely, create a resilient national economy capable of providing for the future needs of all its people. At present they are constrained by the limited scope of their fiduciary duty which focuses solely on the maximisation of returns.
Share Action are seeking wider support for the amendment by asking people to contact their MP to ask him/her to support the amendment when the Bill comes up for a 2nd reading. I have contacted my own (SNP) MP asking him to support the amendment – I hope you will contact yours too.