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Highlights:
- Bank of England’s Andrew Bailey warns against mandating pension funds to invest in UK assets.
- Consolidation of smaller pension schemes is being considered as an alternative to boost UK investment.
- Pension industry and IMF caution that compulsory investment in riskier UK assets could destabilize the financial system.
Bank of England Governor Andrew Bailey has voiced strong opposition to any policy that would require UK pension funds to allocate a portion of their investments to domestic assets, arguing that such a mandate would be counterproductive. Speaking at the Institute of International Finance, Bailey made it clear that he does not “for a moment support a compulsory allocation of pension money to UK assets,” though he acknowledged that the UK’s current investment levels are relatively weak.
The proposal, which was initially put forward by former Chancellor Jeremy Hunt and is reportedly being reviewed by current Chancellor Rachel Reeves, aims to encourage pension funds to channel more of their capital into UK-based companies and infrastructure projects. The idea behind this initiative is to boost domestic growth and address what is seen as a shortfall in domestic investment. However, Bailey and other industry leaders have raised concerns that such a policy could be detrimental to pension holders and may not be in the best interest of the UK economy as a whole.
Potential Strategy: Consolidation of Pension Funds
One alternative to a forced investment mandate is the consolidation of smaller pension schemes into larger pools of capital, a strategy currently under consideration. This approach would aim to centralize funds from small, often “stranded,” direct contribution schemes, effectively creating substantial pools of capital that could then be invested in UK businesses voluntarily rather than by mandate. The underlying objective is to address the lack of investment in the UK by providing larger, more flexible pools of capital that are more likely to be able to support long-term growth domestically.
However, this approach has also faced pushback from within the pension industry, which remains wary of any shift toward enforced investment mandates. Jason Windsor, CEO of abrdn, commented on the broader issue, stating, “The UK needs to make itself an attractive place for investment without punitive tax or without unnecessary regulation… so businesses can prosper and grow in the UK.” Industry leaders suggest that improving the UK’s investment environment should take precedence over policy mandates that could impose new restrictions on pension fund management.
IMF and Industry Concerns About Increased Risk
The International Monetary Fund (IMF) echoed these concerns, warning that compelling pension funds to hold riskier UK assets could undermine the stability of the UK’s financial systems. The IMF emphasized that while encouraging domestic investment is positive, creating requirements that lead to riskier asset allocation for pensions may introduce unwanted volatility and expose pension holders to greater financial uncertainty.
As the government considers ways to foster investment and economic growth, the debate highlights the tension between attracting capital and ensuring financial prudence. For Bailey and other industry figures, the key challenge is striking a balance that boosts UK growth without compromising the stability and security of pension funds. As discussions continue, the emphasis from Bailey and others remains on creating an attractive investment environment, rather than imposing compulsory directives on the sector.
