UK Government to Encourage Pension Funds to Invest in UK Projects

The government's current financial state, with borrowing of £25bn in April, limits its ability to implement meaningful tax cuts or increases in public spending to boost economic growth.

Therefore, the government is looking for other ways to stimulate the economy, including encouraging pension funds to invest more in the UK.

Pension funds currently hold an estimated £1.4 trillion and £1.1 trillion in private and public sector defined benefit and defined contribution schemes, respectively.

However, most of this money is invested outside the UK stock market.

The government wants to encourage pension funds to invest more in the UK, including in UK-listed companies and infrastructure projects.

Some pension funds, such as Legal & General and M&G, have already been investing in infrastructure for some time.

The government is also considering expanding the pension protection fund's remit to take on company pension plans that have not failed, with the aim of making pension funds less risk-averse and more willing to invest in the UK.

The UK government believes that pension fund managers are being too cautious in their investments, which is holding back the economy.

Ministers want to encourage a greater culture of risk-taking in order to benefit pensions savers.

Andrew Griffith, the City minister, stated that the government is working on removing points of friction and streamlining regulations to make it easier for funds to take more risks.

The Personal Pension Protection Fund's (PPF) remit is being considered as one of several ideas for improvement.

Another idea that has gained interest is Canadian-style "collective defined contribution" schemes, which aim to offer a middle ground between defined benefit and defined contribution schemes.

While some are supportive of this idea, others, such as John Ralfe, have pointed out that pooling retirement savings does not automatically increase investment returns for retirees and that the success of investments still depends on how they are made.

Directing pension schemes to invest 5% of their assets into a £50bn growth fund and compelling pension schemes to invest more in the UK are also being discussed.

While compulsion is not universally supported, the government seems set on increasing its intervention in how pension schemes are operated and invested, regardless of the outcome of the next election.