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Ministers are using strong-arm tactics to pressure pension funds to honour a proposed “voluntary” commitment to invest more in UK assets, industry figures have claimed.
A deal to be signed next month would see pension funds agree to allocate 10 per cent of their assets to private funds by the end of the decade, with half in the UK.
But industry executives say the Treasury has warned them it may mandate the requirement if pension funds fail to hit the new targets.
“We have our arms shoved up behind our backs,” said one pensions executive.
The pensions reforms are part of a wider series of City changes planned by Rachel Reeves. The chancellor would set out a financial services strategy at her set-piece Mansion House speech in the City to be held on July 15, people with knowledge of the event said.
Reeves wants to mobilise tens of billions of pounds of pension fund assets to boost growth and increase investment in fast-growing companies, arguing this would also increase returns for savers.
The first step, expected on May 6, will see Reeves and pension fund bosses agree voluntary targets — dubbed the “Mansion House Compact II” — intended to see more funds allocated to private markets, including in the UK.
But Reeves and pensions minister Torsten Bell are also conducting a separate pensions review that will explore whether to introduce new legal powers through the Pensions Schemes Bill this summer.
Pension fund bosses doubt whether ministers would ever resort to using the law to tell them where to invest, arguing that it would cut across their fiduciary duty to get the best possible return for savers.
But they believe that other measures such as league tables or “naming and shaming” could be used by ministers.
Former Conservative chancellor Sir Jeremy Hunt, who presided over the first Mansion House Compact with pension funds in 2023, said he expected Reeves to hold the idea of mandating the measure as a last resort.
“The most likely next step is not direct mandation but a public threat that mandation will follow in a few years if domestic investment continues to lag international benchmarks,” Hunt said.
His original pact in 2023 saw 11 pension funds agree to invest at least 5 per cent of their default fund’s assets in private markets by 2030. Reeves has made it clear that she wants to set a more ambitious target.
One pension fund executive said that legally mandating the level would “open a can of worms”, adding: “How can we explain to savers we are putting money into assets which have been proven, over a period of time, to deliver a lower return?”
“I think there will be a ‘sword of Damocles approach to encourage greater efforts,” said another industry executive. “The new target will be voluntary but you could create a mechanism in legislation that would allow them to make it mandatory.”
The Treasury said it would not “provide a running commentary” on its work, but that its review of pensions investment would consider whether “further interventions may be needed by the government” to ensure investments are benefiting UK growth.
