The Government wants to encourage pension providers to invest in British companies, despite what this could mean for your savings
Chancellor Rachel Reeves is believed to be considering ways to boost investment in UK businesses by mandating pension providers to choose British assets, but experts are sceptical that this plan will be effective.
The Treasury believes its plans to unlock billions of pounds of pension fund assets to stimulate growth will also increase returns for savers.
But not all experts The i Paper spoke to are convinced it will work.
Reeves has made pension reform a key focus of her economic strategy, and is expected to use a speech at Mansion House in July to provide more details of her vision for the sector.
Many of her plans, including her proposal of combining pension funds into so-called “megafunds”, have already had mixed reactions from industry experts.
But there are now warnings that proposals for new legal mechanisms forcing pension providers to “buy British” could have significant repercussions for both the industry and your savings.
What is the Government planning for pension funds?
Reeves is looking at ways to divert billions in pension funds and see them invested in British assets and fast-growing companies, which she has previously argued will offer better returns for pension savers.
Under the Mansion House reforms formulated by her Conservative predecessor Jeremy Hunt in 2023, 11 major pension providers voluntarily agreed to invest 5 per cent of their funds into unlisted equities – shares in private companies which aren’t listed on stock exchanges – by 2030.
The Chancellor is thought to be looking to expand these accords with a greater focus on UK-based investments, in a drive to boost growth, and has her eye on the approximately £2trn currently held in workplace pensions.
There have been multiple reports that in a deal set to be signed next month, pension funds would be asked to agree to increase this target to 10 per cent by 2030, with separate agreements also struck requiring them to invest a proportion of this into UK companies.
According to the Financial Times, both the Chancellor and the Pensions Minister Torsten Bell are also considering introducing new legal powers through the Pensions Schemes Bill to require companies to meet these investment targets, rather than making them solely voluntary.
Other options reportedly on the table include new league tables to “name and shame” companies that fail to meet investment targets.
There have been previous attempts to boost investment in UK businesses, with the Conservatives announcing plans in March 2024 for a new British Individual Savings Account (ISA). This product, however, was scrapped by Reeves in her first Budget in October 2024 in an effort to simplify the ISA regime.
What does this mean for your money?
Many industry experts have warned that the Government’s plans to force pension providers to divert investments to the UK could potentially hit the value of pension pots.
Lisa Picardo, chief business officer at PensionBee, told The i Paper that any “heavy-handed mandate” forcing companies to invest in specific markets could “directly conflict with a scheme’s duty to act in the best interests of savers”.
“Forcing investments into specific asset classes or markets on a set timeframe could lead to poor returns, higher costs and increased risk,” she added.
These concerns were echoed by Tom Selby, director of public policy at AJ Bell, who said he was worried about the “lack of genuine debate over the potential risks being foisted onto pension savers, many of whom will have little understanding of what is happening to their investments”.
“Much of the discussion around this has centred on the idea of this being a ‘win-win’ for savers and the country, with higher allocations to private equity delivering better returns for members and fuelling economic growth into the bargain,” he continued.
“This land of milk and honey scenario is possible, but the DWP’s own modelling points to the obvious uncertainty about potentially risky, expensive private equity investments producing long-term returns that outpace current asset allocations.”
Former pensions minister Steve Webb, who is a partner at pension consultants LCP, also told The i Paper that while many schemes would like to invest more in the UK, they “often struggle to find the sort of investments that work for pension funds”.
How has the pension industry reacted?
Many industry leaders have heavily cautioned the Government against undoing decades of pension reform by mandating how funds are invested, with some accusing the Chancellor of using pension pots for political gain.
Selby claimed that “the UK economy is in a hole and the Government plans to use other people’s money to help dig it out of that hole”, which he added “drives a coach and horses through fiduciary duty principles”.
“This conflation of people’s pensions with political goals comes with dangers and at the very least, the Government needs to be straight about those risks as well as the potential rewards,” he told The i Paper.
He suggested that it would be “reasonable” for the Government to offer some incentives to savers if their money “is to be used for political purposes”, but added that this would be unlikely in the current economic climate amid the global uncertainty created by Donald Trump’s tariffs in the US.
Gareth Davies, the shadow Financial Secretary to the Treasury, has also argued that the Government is hoping to use pension funds for political gain.
Writing for City AM, he said: “If the Chancellor decides to go down the route of mandating investments, it will be because her poor choices mean she needs to shake down pension funds and funnel your money towards UK-based investments that her economic policies have done so much to make unattractive.
“Instead, we should be tackling the underlying issues that our country faces, not limiting the future prosperity of people who have worked hard to save for a pension.
“We need a greater risk appetite in this country, one where entrepreneurs aren’t afraid to fail and where investors are willing to responsibly back them to grow further when they succeed.”
Some industry figures are sceptical, however, that the Chancellor will go down the route of mandating companies to invest in certain sectors, arguing that this would be hugely politically risky for Labour should those investments fall.
“Much as governments would love to do so, it’s unlikely that they will force pension schemes to invest in the UK,” Webb told The i Paper.
“If things were to go wrong, the political fallout would be considerable, as well as the risk of legal challenge. But there will be a drive for voluntary agreements with the industry, probably backed up by league tables and public ‘naming and shaming’, to put pressure on trustees and pension schemes to invest more in the UK economy.”
