Pension funds may still be forced to back Britain, minister warns

Pension funds could still be forced to invest in Britain if they do not voluntarily boost their allocation to UK stocks and infrastructure projects, the pension minister has suggested.

Ministers have been pushing the UK’s £1.3 trillion defined contribution and local government pension system to lift its investment in UK assets since coming to power in July after a drop off in domestic investment over the past two decades.

In her maiden Mansion House speech last week, the Chancellor Rachel Reeves announced plans to consolidate the sprawling £350bn local authority pension pot in a bid to unlock some £80bn worth of domestic investment.

While Reeves stopped short of forcing pension funds to invest in the UK, Treasury officials have been sounding out the City in recent months over the appetite for so-called mandation, which would set a minimum allocation to UK assets, City AM has previously reported.

In an interview, the pensions minister Emma Reynolds has now refused to rule out forcing funds to invest in Britain if the current proposals fail to yield a significant rise in investment.

“We’re not talking about it for now, but let’s see where we get to,” Reynolds told the Financial Times. “Investment in pensions is, as you know, very generously provided for in terms of tax relief.”

After coming to power over the summer, the government expanded the role of pensions minister across the Treasury and its traditional home in the Department for Work and Pensions, with an eye to driving greater investment from the sector.

Reynolds, who was previously policy chief at financial services lobby group The City UK, added that any decision to force a higher allocation to the UK would be “left to the second bit” of the pensions investment review, which closed in September.

In its initial response to the consultation last week, the government revealed the 86 separate local government pensions schemes will be forced to consolidate their assets and outsource their investment decisions to one of eight asset pools around the country.

The measures have been designed to remedy a dearth of domestic investment from the sector which has been blamed in part for the sluggish performance of UK stocks.

British pension funds now allocate just four per cent of their total assets to UK stocks, down from over half 25 years ago, according to the think tank, New Financial.

Minister under the previous government, along with the City of London corporation, corralled 11 of the top pension money managers to commit five per cent of their assets to unlisted equities by 2030 in an attempt to funnel cash into start-ups.

Sir Nicholas Lyons, chair of Phoenix Group and former Lord Mayor, who masterminded the plans, told City AM last week that the threat of mandation was “most powerful when it’s kept in the back pocket”.

He argued that requiring greater pension funds to have greater transparency about their asset allocation would likely make a big difference on its own.

“Once people start having to be transparent about what they do, they tend to sort of read the writing on the wall,” he said.