The UK government’s ambition to channel more pension capital into domestic investment may require a more targeted approach than mandating schemes to invest in specific assets, according to a new report from consultants LCP and Frontier Economics.
The report (UK pension schemes and productive finance – a framework for effective intervention) examines whether policy interventions are justified to encourage pension funds to allocate more capital to productive finance, including infrastructure, start-ups and high-growth companies.
Ministers have expressed concerns over the low level of investment in such assets compared with some international peers, particularly Australia. The government has floated an idea of introducing powers to require schemes to allocate to private markets if voluntary commitments are not met.
However, the report argues that differences in investment behaviour between UK pension funds and those overseas are largely explained by structural factors, such as scale, rather than a reluctance by UK funds to invest domestically.
Australian superannuation funds, for example, tend to be significantly larger and more mature than most UK defined contribution (DC) arrangements.
As UK schemes grow and consolidate, the report suggests their portfolios are likely to evolve naturally toward a broader mix of assets, including those targeted by government policy.
Some of the largest UK pension funds have already built meaningful allocations to private markets, and others are expected to follow as they increase in size.
Rather than comparing asset allocations across countries, the authors argue that policymakers should focus on identifying genuine market failures, such as situations where the level of investment delivered by markets falls short of what would be socially optimal.
This could include investments that generate environmental benefits not fully captured in market returns, or areas where investors face particular challenges assessing long-term risks and returns, such as early-stage ventures or large infrastructure projects.
Coordination failures could also discourage schemes from allocating to higher-cost investments if they fear standing out from competitors on charges.
In such circumstances, the two firms said there may be a case for targeted government intervention. However, the report stresses that policymakers must first establish clearly what market problem they are seeking to solve and whether the government has the necessary expertise and information to intervene effectively.
The analysis reviews a range of existing initiatives designed to encourage productive finance investment. Measures that promote greater scale across pension schemes are seen as potentially helpful in lowering barriers to private market investment, although consolidation is already underway across the sector.
Similarly, the development of Long-Term Asset Funds (LTAFs) could facilitate access to illiquid investments for DC pension funds. The report also supports proposals allowing providers to transfer poorly invested or underperforming group personal pension policies into more modern arrangements.
However, the authors express reservations about other policy ideas, including proposals for simplified “value for money” ratings for schemes. Such ratings could risk encouraging herd behaviour, with schemes reluctant to deviate from peers — potentially reinforcing the very coordination failures policymakers seek to address.
The report also calls for greater scrutiny of public investment programmes involving organisations such as the British Business Bank and the National Wealth Fund. Policymakers should ensure these initiatives address genuine market gaps rather than subsidising investments that would have occurred anyway.
Finally, the authors argue against granting government powers to mandate DC pension investment in private markets if voluntary targets are not met by 2030.
They conclude that overriding trustee investment decisions or imposing top-down allocation targets would be a blunt policy tool and could ultimately undermine pension outcomes if it leads to suboptimal investment strategies.
Mandation concern
Concern about mandation extends beyond the pensions industry. A YouGov survey commissioned by the Association of British Insurers (ABI) found 72% of UK adults have little or no confidence in the government to make the right pension investment decisions. Only 1% have a lot of confidence.
Among those over 45, 46% believe requiring funds to invest in certain assets would reduce their retirement savings, 28% are unsure, and 21% expect no impact. Just 5% think it would be positive.
On government plans to mandate investments in UK companies or infrastructure, 49% said it was a bad idea, 27% were unsure, and 24% supported it. Looking ahead, 71% have little or no confidence that future governments would use such powers responsibly, with 31% expressing no confidence at all.
Yvonne Braun, director of long-term savings policy at the ABI, said: “People need confidence that pension funds and government are acting in their best interests, but many fear these plans could threaten their retirement living standards. Mandation risks eroding public trust in the entire pensions system, both now and in the future.”
She added: “We strongly support investment in the UK economy, which is why we helped create the Mansion House Accord. But investment must always be driven by savers’ best interests, and that principle should not be compromised.”
Ministerial promise
At last week’s Pensions UK conference in Edinburgh, pensions minister Torsten Bell said the government would clarify the reserve power in the Pension Schemes Bill, which could enable mandated investment.
He said: “The only purpose of the reserve power in the Pension Schemes Bill is to backstop the [Mansion House] Accord goals.”
