Key Takeaways
- • A new report from Frontier Economics and LCP urges UK ministers to tread carefully before intervening in how pension schemes invest, warning that heavy-handed policies could undermine member outcomes.
- • The report argues UK-versus-overseas differences in pension investment are largely structural (scheme size and maturity) rather than cultural, and that UK schemes are likely to diversify into infrastructure and private markets as they grow.
- • The authors say intervention should only follow identified 'market failures' or 'coordination failures', and only where policymakers have sufficient information and capability.
- • The report is critical of Pension Schemes Bill proposals that would let government mandate DC schemes to invest in private markets if voluntary targets are not met by 2030.
- • The report also raises concerns about simplified 'value for money' ratings with four performance bands, warning they could encourage herding behaviour.
Summary
Ministers have been urged to exercise caution before intervening in how UK pension schemes invest their assets, amid growing political pressure for funds to allocate more capital to the domestic economy. A report titled 'UK Pension Schemes and Productive Finance – a framework for effective intervention', produced by economics consultancy Frontier Economics and pensions consultancy LCP, warns that heavy-handed policies aimed at pushing schemes into UK infrastructure, start-ups and technology businesses could risk undermining member outcomes.
The government has increasingly signalled that it wants pension schemes to channel more money into so-called 'productive finance'. Officials have expressed frustration that UK schemes allocate relatively small portions of their portfolios to domestic investment, with overseas pension funds often providing funding for major UK projects. Policymakers have floated measures ranging from incentives funded by billions of pounds of public money to potential mandates requiring defined contribution schemes to invest in private markets.
According to the authors, differences between UK and other countries' pension investment patterns are largely structural. Systems such as Australia's are far larger and more mature, which naturally leads to greater allocations to infrastructure and private markets. As UK schemes grow, the report suggests they are likely to diversify similarly without government intervention. The authors argue policymakers should identify genuine market failures, such as projects whose social benefits are not captured by private investors, or difficulties in assessing long-term risks in early-stage or infrastructure investments. They also flag coordination failures, where schemes may be reluctant to be early adopters of higher-cost strategies for fear of appearing expensive relative to peers. Even then, the report says, intervention should occur only where policymakers have sufficient information and capability.
The report supports policies that increase scheme scale, including DC consolidation, and the development of Long-Term Asset Funds to give DC schemes easier access to illiquid assets. It also backs proposals allowing providers to move poorly performing Group Personal Pension policies into better-governed arrangements. It raises concerns, however, about simplified 'value for money' ratings that would sort schemes into four performance bands, which the authors warn could encourage herding behaviour. The report additionally calls for rigorous evaluation of public investment vehicles such as the British Business Bank and the National Wealth Fund, to ensure they address real market gaps rather than subsidising investment that would have occurred anyway.
The report is particularly critical of Pension Schemes Bill provisions that would allow government to mandate DC schemes to invest in private markets if voluntary targets are not met by 2030. Paul Johnson, senior adviser at Frontier Economics, said any intervention 'needs to be very carefully assessed' and should be tied to specific market failures rather than 'some arbitrary top-down target', adding that 'governments should act with great humility for fear of reducing the value of people's pensions.' Steve Webb, partner at LCP, said comparisons with overseas systems are often misleading and argued that the government 'should not be in the business of over-riding trustee decisions'.
The government has increasingly signalled that it wants pension schemes to channel more money into so-called 'productive finance'. Officials have expressed frustration that UK schemes allocate relatively small portions of their portfolios to domestic investment, with overseas pension funds often providing funding for major UK projects. Policymakers have floated measures ranging from incentives funded by billions of pounds of public money to potential mandates requiring defined contribution schemes to invest in private markets.
According to the authors, differences between UK and other countries' pension investment patterns are largely structural. Systems such as Australia's are far larger and more mature, which naturally leads to greater allocations to infrastructure and private markets. As UK schemes grow, the report suggests they are likely to diversify similarly without government intervention. The authors argue policymakers should identify genuine market failures, such as projects whose social benefits are not captured by private investors, or difficulties in assessing long-term risks in early-stage or infrastructure investments. They also flag coordination failures, where schemes may be reluctant to be early adopters of higher-cost strategies for fear of appearing expensive relative to peers. Even then, the report says, intervention should occur only where policymakers have sufficient information and capability.
The report supports policies that increase scheme scale, including DC consolidation, and the development of Long-Term Asset Funds to give DC schemes easier access to illiquid assets. It also backs proposals allowing providers to move poorly performing Group Personal Pension policies into better-governed arrangements. It raises concerns, however, about simplified 'value for money' ratings that would sort schemes into four performance bands, which the authors warn could encourage herding behaviour. The report additionally calls for rigorous evaluation of public investment vehicles such as the British Business Bank and the National Wealth Fund, to ensure they address real market gaps rather than subsidising investment that would have occurred anyway.
The report is particularly critical of Pension Schemes Bill provisions that would allow government to mandate DC schemes to invest in private markets if voluntary targets are not met by 2030. Paul Johnson, senior adviser at Frontier Economics, said any intervention 'needs to be very carefully assessed' and should be tied to specific market failures rather than 'some arbitrary top-down target', adding that 'governments should act with great humility for fear of reducing the value of people's pensions.' Steve Webb, partner at LCP, said comparisons with overseas systems are often misleading and argued that the government 'should not be in the business of over-riding trustee decisions'.
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