Pension scheme investments

The pensions investment review

The government launched a pensions investment review in August 2024, led by the Minister for Pensions Emma Reynolds. The review is seeking to boost investment, increase saver returns and tackle waste in the pensions system.

An interim report was published on 14 November 2024. Full recommendations will be published in 2025. Following the interim report, the government sought further views on proposals to increase scale and consolidation and looked at how pension fund investments could support UK economic growth. The interim report also set out proposals for the local government pension scheme on pooling assets and strengthening governance for consultation.

How do pension schemes invest?

Pension schemes invest in different types of assets: including bonds (fixed-income investments) issued by corporations and governments, equities (shares in companies), property, infrastructure, and other alternative investments.

Defined contribution (DC) schemes do not provide a guaranteed pension and instead provide people with a pot of money they can use in retirement. The value of the pension pot can increase or decrease depending on factors, including investment returns and contributions made.

It is not straightforward to work out how UK DC schemes invest between different types of asset, partly due to inconsistent and overlapping definitions. The Pensions Policy Institute estimated that pension schemes invest 6% of their assets in a narrow definition of UK productive assets – including only private equity and alternative investments. Using a broader definition that includes publicly listed equities, corporate bonds, private equity, and alternative investments – the share was 18%. The pattern of asset allocation varies significantly by type of scheme.

Encouraging investment in the UK economy

Successive governments have looked for ways to get UK pension schemes to do more to support the UK economy, while at the same time providing the potential for improved outcomes for pension savers. The current government wants “to overcome the barriers to increasing pension fund investment in UK productive assets to support our capital markets, which in turn will drive growth in our economy and improve the retirement outcomes for future pensioners.”

In a call for evidence, published in September 2024, the government asked for views questions on consolidation, value for money, and investment in the UK. Building scale through consolidation could improve investment decisions because larger schemes tend to have better governance and greater capacity to make complex investment decisions. Proposals for a value for money framework are intended to encourage a greater focus on investment returns and service standards, in addition to costs and charges.

The Pensions and Lifetime Savings Association says that, while these measures are important, they are not a ‘silver bullet’ for driving investment into UK productive finance. They would need to be part of a “much broader strategy,” including the development of suitable investment opportunities, fiscal incentives and policy certainty.

The Association of British Insurers identifies a risk of policy on value, scale and consolidation unintentionally conflicting with the Government’s policy of increasing investment in UK assets. For example, if recent underperformance of UK equities were to continue, it could reflect poorly in the value metrics of those invested in them, which would have significant consequences for those businesses. Nor would scale and consolidation necessarily increase weighting towards the UK, as bigger schemes can access a wider pool of assets globally.

For organisations representing pension trustees, a core principle is that they should continue to be free to make decisions in line with their fiduciary duties to act in the best interests of scheme beneficiaries.

Defined contribution pension schemes

This briefing concentrates on defined contribution (DC) schemes, where employer and employee contributions are paid into a fund which is invested and then then be used to provide an income stream at retirement, where the value of the fund will vary according to contributions made, investment returns, costs and charges and decisions when savings are drawn.

Alongside its work on DC schemes, the Government is also looking at consolidation and governance in the Local Government Pension Scheme (LGPS). The LGPS is a defined benefit (DB) scheme which provides a guaranteed income in retirement based on salary and length of service. For more on the background, see Commons Library research paper, Local Government Pension Scheme investments. Separate work is also ongoing to consider how DB schemes might invest more in the UK economy.