Pension Investment in UK Equities

Tuesday 25th November 2025 Westminster Hall

16:30

[John Glen (Salisbury) (Con)]

I beg to move,

That this House has considered pension investment in UK equities.

It is a pleasure to serve under your chairship, Mr Stringer. I think all hon. Members would agree that UK pension funds are hugely important, primarily to the millions of future pensioners, but also to the many scale-up businesses that are seeking additional investment and need extra capital for growth. They are also an important part of the UK’s capital markets more broadly.

The UK has the second largest pool of pension capital in the world, but only 4% of it is allocated to UK assets. UK defined contribution pension scheme assets are set to grow from around £500 billion in 2021 to £1 trillion by 2030, an increase of 100% over nine years, and that growth will accelerate faster beyond that date. The key issue I wish to focus on is how we are to regulate, manage and enable the future form of that pool of capital, and the appropriate oversight of regulators or Government—if any—of the way it is managed.

As I think all Members want, the Government have stressed the growth imperative and its prioritisation, but under-investment in the UK economy will be a significant dampener on growth. Over the past 25 years, allocation to UK equities by UK pension funds has fallen from more than 50% to 4.4%. Since the global financial crisis, the UK has under-invested, both in absolute terms and compared with our G7 peers. Our investment-to-GDP ratio is around 17% to 18%, compared with our peers’ 20% to 25%. That investment gap accounts for around £100 billion.

The Government have introduced meaningful reforms. The closure of defined benefit schemes has resulted in large amounts of capital being moved from equities to bonds. Although that was a rational response to match the profile of obligations of those schemes, it is questionable whether it is optimal for the wider economy. That eagerness to match payouts to known obligations of a defined population has perhaps encouraged a lack of ambition in investment in the wider economy.

What has happened progressively with DC scheme regulation is passive tracking rather than active investment. We have prioritised the minimisation of costs over returns. That has incentivised more and more funds to invest in cheap asset classes, almost alternating their investments, with fixed income, property and indexed funds being used. That is very frustrating, because over the past decade we reached consensus on auto-enrolment, and there was an emphasis on saying, “Oh, we mustn’t have any fat-cat fund managers taking too-big fees”. There was an anxiety about that, which drove an oversimplification of automated fund management. It allowed everyone to say, “The fees are very low”, but we did not have the right focus on performance and whether we were investing in the right things in the economy. It is obviously cheapest for a fund to go to passive, as it does not require active management and the skills that come with it.

There have been previous fundamental reforms, such as the removal of dividend tax credits. Before 1997, when a UK company paid a dividend, it was accompanied by a tax credit, and pension funds could reclaim that credit in cash from His Majesty’s Revenue and Customs. That meant that pension funds effectively received dividends gross of tax, boosting their investment returns. That reduced the effective yield on UK equities held by pension funds by around 20%, which was then the tax credit rate. There have been changes, with ISAs introduced in 1999 and self-invested personal pensions being widened in 2006, but this has removed the focus on UK investment.

[Kit Malthouse (North West Hampshire) (Con)]

My right hon. Friend makes an interesting point about the change from defined benefit to defined contribution and the impact of the taxation changes that brought that about. Would he care to comment on whether he sees that as part of an unwitting repricing of the return on risk, which has impacted not only on pension funds, but more widely? He said that pension fund investment in the market is down, but retail investment in the market overall is also down very significantly. It feels like the British people as a whole have lost their appetite for risk, and that might be because the return on risk is now too highly taxed.

[John Glen]

Perhaps unsurprisingly, my right hon. Friend anticipates an argument that I am going to move on to about the wider culture of awareness of where investments are happening in our pensions, how important that is, and how we need to be cognisant of the gap that exists.

[Jim Shannon (Strangford) (DUP)]

I thank the right hon. Gentleman for securing this debate. The right hon. Member for North West Hampshire (Kit Malthouse) referred to the impact on Britain, but there is an impact regionally as well. Many workers in Northern Ireland are enrolled in UK-wide pension schemes and equity systems, and their long-term financial security depends on those schemes being able to generate strong, sustainable returns. When the right hon. Gentleman presents his proposals and asks to the Minister, can he try to obtain an assurance that whenever legislation comes through, similar things will happen in Northern Ireland, including for my constituents, thereby giving us all the equality we should have in this system?

[John Glen]

The hon. Gentleman makes a reasonable point. In a moment, I will speak about what needs to change and where we need to get to.

Returning to my argument, the Pension Schemes Bill, which will have its Report stage next week, has made some welcome progress—I have to acknowledge that to the Minister. It has received significant cross-party support in many areas. The consolidation of DC schemes to provide greater scale and move away from a fragmented system has long been a journey that most people would see as desirable, but we must think about the scale of capital that our growing companies need. I am concerned about how quickly some of those changes will take place. Having been in intense dialogue with the Prudential Regulation Authority and the Financial Conduct Authority when I was in the Treasury, I know that these things do not happen quickly enough. I urge the Minister—though I know he does not need much urging—to be robust in ensuring accountability on the delivery of some of these things.

To advance our understanding of the shift away from equities and towards bonds, let me note that in 1997, UK pension funds held 73% of their portfolios in equities and 15% in bonds. Those figures now stand at 34% and 43% respectively. I have talked about the particular aversion to UK equities, with UK pension funds investing 4.4% of their funds in domestic equities, compared with an international average of 10.1%. However, at the same time, the UK provides pension tax advantages worth more than £48 billion. That is £48 billion of taxpayers’ money that is essentially there to enrich our contributions and lay down a marker for the future. At the moment, though, there is no expectation that any of that is invested in the UK—this relates to mandation, which I will discuss now.

Around half of DC funds are in global allocations. My concern is that outflows from UK equities will continue as that global allocation continues and relative growth is seen in other markets, such as the US. As other economies grow, the UK part of the pie will automatically shrink, which means less money going into UK firms from these sorts of investment funds. As that passive fund practice becomes more prevalent, businesses such as the ones in Northern Ireland mentioned by the hon. Member for Strangford (Jim Shannon) are simply off the radar. They do not receive any analysis, and mid-cap and small-cap firms lose out, with pools of capital never being available to them. As such, that 4% investment in equities is likely to continue to fall.

The big point I want to make is about what people think of their pension schemes. New Financial, a well-known and respected think-tank connected with the City, did a survey of 1,000 working adults in the UK with a pension. That survey graphically highlighted what a “low level” of understanding people have of their pensions and the

“disconnect between their expectations and the industry.”

It said:

“On average, people thought 41% of their pension was invested in UK companies or the UK stock market (out by a factor of five to 10 times)”,

and, staggeringly, that

“two-thirds of people said pensions should invest more in UK equities even if the returns might be lower than investing in other markets.”

There is clearly a gap in knowledge and understanding. I advocated against the Department for Education’s backstop; I did not make much progress when I was in Government, but I am glad that this Government have made progress on financial education in the Department for Education and that it has now become part of the curriculum. This is a key chapter that is needed in that textbook.

I am anxious that the answer should not be for the City and pension fund managers to say, “We know best, we have a fiduciary duty—don’t worry about it.” Auto-enrolment has helped provide them with enormous funds to invest, but the disconnect between public expectation and what they are doing with those funds must and should be addressed. The vast majority of consumers investing in DC schemes do not change from their default allocation, although they are of course able to do so. Those defaults require approval, so alongside a campaign to get people to understand what is happening with their pensions and where their money is being put, it is worth asking people to verify what proportion of their pension savings are being invested where. They have that discretion; if they do not exercise it, that investment will default to whatever the scheme is going to do, and the scheme will likely continue in a similar way.

The London Stock Exchange Group tells me that by 2030, overall investment in UK equities by DC pensions would increase by around £76 billion—potentially as much as £95 billion—if this option were used. That is not mandation; I think that would be overreach, but I am sympathetic to the disconnect that exists. We must find a way to open up a proper discussion and increase awareness of the gaps where money is currently not being invested. I recognise that the Government have maintained a reserve power to mandate, although I doubt they will ever use it. However, I believe that individuals should be more empowered to take decisions, and I think they would be more empowered as active members of a DC fund. At the moment, they are not exercising that right. Consumers do and must have a choice about how their pensions are invested, and proposals to amend how default funds are allocated do not, and should not, prevent people from choosing exactly how they want to invest their pension pots.

There are so many opportunities in this country, such as in life sciences—my right hon. Friend the Member for North West Hampshire (Kit Malthouse) has a great understanding of that sector. When we are looking for that scale-up capital, the lack of funds in the UK to provide options for series B and sometimes series C funding is manifest. I just feel that we are missing an opportunity. I will understand if we do not go for mandation—I am sympathetic to that decision—but we should do something in between.

I know we are on the eve of the Budget, and as the Minister said to me as we entered the Chamber, there is little opportunity for him to adjust anything. I do not know what changes will be made tomorrow to pensions. There is obviously a lot of speculation about a reduction in ISAs, but let us get that in perspective as well. Only about 7% of those who have ISAs use the £20,000 limit. I do not believe that if there is any sort of mandation of the use of equities, people will go out and invest in them overnight, because the vast majority of people who have an ISA are at a later stage of life, and their ISA is in cash, so they will not do that anyway.

Let us get it in perspective. Last year, around £750 billion was invested in ISAs: £461 billion in stocks; £289 billion in cash. Last year, the Pensions Policy Institute estimated that there is a total of £3 trillion in UK pension assets across annuities, DC funds and DB funds. That is where the pools of capital can be opened up for investment in the UK economy. We need a greater focus on the public markets, and a vibrant, active, engaged and informed investor base to change the way that we move forward.

I have a couple more points to make. It is salutary to reflect on what happened with Arm Holdings: a British success story founded and built in Cambridge. As we know, it is a producer of semiconductors and software originally listed in London. The company was taken private because it felt that the public markets in this country could not support it; there was not enough liquidity in the markets. Arm was subsequently re-listed in New York, and since being taken off the London Stock Exchange, its valuation has grown by £112 billion. Of that growth, only £825 million has gone to UK investors. Had it stayed listed in the UK, that number would have been £43 billion. That would have meant higher pension valuations for a lot of people in this country, and more revenue for the Treasury from capital gains. It exemplifies the problem that we have: the lack of active, open markets where investors take risk and adopt a profile similar to those seen in the US. The FCA is disempowered and discouraged from trying to offer consumer redress. Through better financial education, we could get people to engage with the significant obligation that they have to save for the future, to take decisions that are in the interests of the UK economy and to pump more money into UK companies.

In conclusion, I welcome many provisions in the Pension Schemes Bill. Poorly performing pensions need to be challenged. I welcome the consolidation and scale-up of the pots, which will take too long and should be encouraged to move forward swiftly. But I have an anxiety that in a legitimate effort to hold back from mandation, there is a gap in thinking about how we open up the public’s understanding and imagination regarding where they can invest. I urge the Minister to move forward with some tougher rules around how people verify the choices that they are making so that the powerful voices who run the pensions industry do not default to saying, “We know best; we have fiduciary duty, and we will do it better than you could dream of doing.” The evidence is that that is not what people want. A golden thread of careful and delicate interventions is needed so that we can transform public behaviour and outcomes for our pensions industry.

[Several hon. Members rose—]

[Graham Stringer (in the Chair)]

Order. I remind hon. Members that they should bob if they wish to be called to speak. I intend to call the Lib Dem spokesman at 5.10 pm and three hon. Members wish to speak. They will have roughly six minutes each.

16:49

[Richard Tice (Boston and Skegness) (Reform)]

It is a great pleasure to serve under your chairmanship, Mr Stringer. I congratulate the right hon. Member for Salisbury (John Glen) on securing this debate.

In reality, equity investment from pensions is deteriorating because UK equities are not performing relative to their global counterparts. One of the reasons for that is that we have become over-regulated and over-taxed. When the big bang was launched 40 years ago, the City of London became the most important financial centre in the whole world. In the last 10 years, that has changed. That is why, at Bloomberg a couple of weeks ago, I announced the creation of four key working groups to look at a complete reset—a sort of big bang 2. We need to look again at the whole issue of regulation, and at the status of the FCA relative to the PRA and the Bank of England—that is working group No. 1. Working group No. 2 is on pensions and savings. We also need to consider big-picture issues: why, for example, are we giving tax relief on £300 billion of cash ISAs? How does that help the UK economy? Those are the big questions that we need to look at.

The third working group is on small and medium-sized enterprise growth capital. The right hon. Member for Salisbury asked why it is that on second, third and fourth-phase rounds of fundraising, companies are going elsewhere in the world. The truth is that our markets have become too difficult for raising that additional capital. The fourth working group that I have set up—and it will report in six to nine months’ time—is on taxation. We are over-taxed, and we enjoy the longest tax code in the world. At 24,000 pages, it is four times the combined works of “Harry Potter” and nothing like as much fun.

We need to look again at all those issues, and then we need to look at the performance of our pension funds. If we look at the performance of one of the biggest pension funds in the world, the local government pension schemes, which I have been very focused on, we will see that they are being overcharged substantially, by a factor of about five of what they should be paying, and they are underperforming. In the year to March ’25, the LGPS produced a great performance—not—of 3.3%, yet paid out over £2 billion in fees. Frankly, if the active funds cannot match the tracker, why not use a tracker? That is the challenge for the active industry.

One of the reasons that the LGPS is underperforming is because too much of them are invested in unlisted funds, and now invested in what I would call quite woke funds, but that is a whole different issue. People cannot get out of those unlisted funds, which are at 20% to 40%, and those funds cannot be properly valued. The fees are much higher and they are not performing as well. Those are the key reasons why the performance is deteriorating. The 10, 20 and 30-year track records of the local government pension schemes are all at over 7% in the long term, but in the short term, they are rapidly deteriorating because of wrong investment decisions and overpaying fees, and because we have a market in the UK that is over-regulated and over-taxed. All of those things reduce the incentive to invest.

For many people, it is complicated, but fundamentally, if the active fund managers overcharge and underperform, we should not be surprised if investors end up going elsewhere, and that might mean overseas. We need to change the way we look at things, deregulate sensibly and reduce unnecessary taxation in order to improve the quantity of pensions invested in UK-listed equities.

16:52

[Callum Anderson (Buckingham and Bletchley) (Lab)]

It is a pleasure to serve under your chairship, Mr Stringer, and to keep the Minister company on the Government side. I congratulate the right hon. Member for Salisbury (John Glen) on securing this debate and on a highly compelling speech and argument.

The question of whether we can create the right incentive framework for domestic pension funds to invest more in the UK is a strong one—not only in UK equities but across all asset classes, including gilts and infrastructure. It goes to the heart of the Government’s growth mission. It is imperative for strengthening our national economy and for unlocking the regional potential of our economies, including in my own constituency of Buckingham and Bletchley, which lies in the engine room of the Oxford-Cambridge growth corridor.

Backing British businesses of all types and sizes across the UK with British capital is fundamental to jobs, greater levels of innovation and, in the long run, higher household incomes. However, it is also important for our economic sovereignty. As hon. Members have explained, if we are unwilling to invest in our own economy, we risk increasing our reliance on international capital, which may not necessarily prioritise the UK’s long-term national interest. I welcome the work that the Minister has advanced through the Pension Schemes Bill. It is a good Bill. Creating larger pension funds that are able to invest at scale will deliver stronger returns for millions of savers, including those in my constituency.

The scale of the challenge with regard to domestic pension investment in our economy is stark. The right hon. Member for Salisbury was clear in setting out the data from the new financial think-tank. The right hon. Member for North West Hampshire (Kit Malthouse) and the hon. Member for Boston and Skegness (Richard Tice) explained the steady decline of domestic pension investment over the last two, three or four decades.

Data that I would cite for international comparisons lies in the Capital Markets Industry Taskforce, of which I know the London Stock Exchange Group is a leading member, and which I cited on Second Reading of the Pension Schemes Bill, but it is worth repeating now. Canadian pension funds are hugely overweight in their own domestic economy relative to their share of the global markets by about two and a half times. The figure for France is a factor of nine; Italy 10; Australia 27; and South Korea is an astonishing 30 times overweight. By contrast, in the United Kingdom we are underweight by about 40%. That was the data from about a year ago. This is not a marginal trend; it identifies a structural weakness in our global competitiveness, our industrial capability and our long-term national economic resilience.

As has been said, it is not just about our pension funds. Since the pandemic, UK households have accumulated greater levels of cash savings—depending on the financial institution, that is £600 billion, £700 billion and so on. It is positive that UK households have bigger cash buffers, but having excess cash not only potentially damages the ability to grow long-term wealth and secure financial security in the long run, but it deprives the many innovative scale-ups that we have in the UK from the investment that they need to grow, create jobs and deliver tax receipts for the Exchequer.

If we want a stronger, more secure economy, we have to mobilise all sources of domestic capital—that includes pension funds, retail savings and also our public institutions like the British Business Bank—to meet what I think are three principal goals. The first is to strengthen the integrity and vitality of UK public equity markets—I do have an interest, having worked for the London Stock Exchange Group before I entered Parliament—which was rightly cited as a priority in the Government’s financial services growth and competitiveness strategy earlier this year.

Listed companies are already employing 4 million people across the UK. When domestic capital supports the domestic economy, firms can raise further growth capital, which we saw to its benefit during the pandemic. It can also create further jobs. A vibrant public market can also attract, in turn, a wider pool of investors, domestic or international, and create a virtuous cycle of demand, valuation and innovation.

Secondly, I have already referred to national economic resilience. When domestic firms depend primarily on foreign investors, as we have seen in the case of Arm—I was at LSEG at the time—they are more likely to list overseas and more likely to relocate there. Their leadership teams shift supply chains and take their tax receipts and intellectual property with it. We need to mobilise our own domestic capital, which secures our long-term economic sovereignty.

Thirdly, lastly, and perhaps most importantly, it is about ensuring that our exciting innovators, of which there are many in my own constituency, are able to thrive and reach their full potential here. They all require patient capital, which was outlined in the industrial strategy. If Britain wants to lead in those industries, we must mobilise all our pension savings to give our unicorns the opportunity to compete globally. I will stop there because I am very aware of my six minutes.

16:58

[Bobby Dean (Carshalton and Wallington) (LD)]

I thank the right hon. Member for Salisbury (John Glen) for securing this debate. We are colleagues on the Treasury Committee, and I always find his contributions extremely thoughtful. He has the best interests of the country at heart, so I thank him for securing this debate.

We probably all agree that the UK investment system is broken, and not because of a lack of capital. There is £2.2 trillion-worth of capital locked up in UK pensions, and I think the consensus is that it is just not targeted well from the perspective of UK growth. We have already heard some figures cited: less than 5% of the funds are being allocated to UK assets, down from the highs of 50% in the ’90s, and that compares poorly with a lot of our international peers. Of course, there is not one way to fix this problem. Other hon. Members have highlighted other structural issues to do with regulation, culture, tax and demand for capital—people often speak to me about the need to get the pipeline of investable projects up in the UK—but mobilising these pools better through pensions reform is surely part of the solution.

UK pensions put too much into low-performing bonds and far too much into global passive indices. The effect is that funds such as the MSCI are putting more into Apple than they are into the entire UK market—I think 4.9% is allocated to Apple and 3.4% in the UK. That leads to a vicious circle, which other hon. Members have alluded to. Time and again, the UK’s best are sold to US big tech: we have heard references to Apple buying some of our best semiconductor and fintech firms, and another example is Google purchasing DeepMind. There are other factors here, including how the London stock exchange operates and the troubles with initial public offerings, which we have spoken about. However, it is worth thinking about how the role of passive indices amplifies that effect. I worry that with the advent of artificial intelligence-driven algorithms in the financial sector, it may be amplified further.

What we see is that the capital goes to the US tech giants, they buy the most innovative UK companies, that makes the UK market less attractive, and that means that UK pensions feel like they need to put more money into US companies—and the doom loop continues. I fear that unless we break the doom loop, we will see complete and utter dependence on a handful of US tech companies. All this happens while UK pension funds receive around £49 billion-worth of tax benefits, so the Government have every right to do something about this issue and act in the interests of our own country. More than that, as the right hon. Member for Salisbury noted, UK pension savers are demanding this. They expect more of their money to be put into British funds, even if it means declining returns.

I empathise with the reasons why the Government want to go down the route of reserve powers and mandation. There has been lots of talk of an industry backlash, but some funds I have spoken to say that they want much stronger guardrails in relation to any mandation. They worry about mandation being used as a substitute for the wider structural reforms that we have spoken about. They also worry about future—perhaps more interventionist—Governments, and they want a much stronger set of guardrails for mandation, if it is to come.

In place of mandation, there is a middle ground. The right hon. Member referred already to the enormous power of default settings, which we have seen with auto-enrolment. Behavioural science and behavioural economics tell us a lot more about how people actually respond; what works is not always rational self-interest and incentives. If we change the default options about UK equities and allow an opt-out, we will probably find that most people do not opt out. Research from New Financial states that a 25% allocation to the UK in these default funds could be worth up to £95 billion. That alone would be transformative, without the need for mandation.

At the moment, UK savers are losing out twice: not only because they are getting poorer returns over the long term, but because we are choking off investment in the areas where they choose to live and retire. We should keep both those things in mind.

17:03

[Steve Darling (Torbay) (LD)]

It is a pleasure to serve under your chairmanship, Mr Stringer. I congratulate the right hon. Member for Salisbury (John Glen) on obtaining the debate, which has been quite enlightening; his liberal views on the way forward for pensions are very welcome. The Liberal Democrats are keen to see investment in our British economy, and we are particularly exercised about the need for investment in social rented housing, our high streets and climate change. From my own patch, I reflect on the conversations I have had with our high-tech cluster in Torbay, which often faces challenges in getting investment and getting the right vehicles to support it.

Reflecting on key areas for us, one can understand the principles behind mandation, but there is also the law of unintended consequences, and we have grave concerns about it. A power of mandation might be seen as a reserve power. I am sure, or at least I hope, that all Ministers in power at the moment are reasonable people, but who knows what might happen in the future? Giving the power of mandation to a future Government who may not be run by reasonable people is a significant risk. One only has to look at the other side of the Atlantic and see who now dwells in the Oval Office to realise that some curious decisions have been made there. For many of us on this side of the Atlantic, if the power of mandation was given to similar people here, that would cause us grave concern.

[Kit Malthouse]

I agree with the hon. Gentleman’s views about mandation, as the Minister knows, but would he care to comment on its impact on the appetite for risk? We have learned from my right hon. Friend the Member for Salisbury (John Glen) that since the change in taxation, the general trend in pension funds has been for managers to de-risk and to go into passive funds. If they do so, no one can complain, they are not taking any risk, they do not have to outperform or underperform the market and they get what they want. If they can pass off yet more risk to the Government and effectively sit there and get paid to be told by the Government what to invest in, they will bite the Government’s hand off, will they not?

[Steve Darling]

The right hon. Gentleman makes a powerful point. One can go back to the significant crash of 2008. I suggest, and I am sure many people would agree, that that has left a scarring on the system and a fear of risk. For many of us who know about the system, risk is a good thing, because it can result in growth. If we do not embrace risk, we will not embrace growth. One minimises growth by failing to go for those risks. I agree that mandation potentially allows people to shy away from risk.

As Liberal Democrats, we are really keen to make sure that there are vehicles for investment, whether in social rented housing, in cleaner energy, in our high streets or in our high-tech industries. However, such vehicles should be designed so that people become aware of them and can make a choice themselves, rather than being dictated to by the state.

17:07

[Rebecca Smith (South West Devon) (Con)]

It is a pleasure to serve under your chairmanship, Mr Stringer, and I congratulate my right hon. Friend the Member for Salisbury (John Glen) on securing this important debate. Given his experience as a Treasury Minister for many years, it has been a pleasure to hear his thoughts on this issue.

My right hon. Friend could not have chosen a better time for this debate, given tomorrow’s Budget. Let us hope that private pension holders are not penalised in comparison with public sector pension holders. Amid all the drama of the Budget, let us not forget that the Pension Schemes Bill comes back on Report next week. Having sat on that Bill Committee, I concur with my right hon. Friend’s point about the need for pension education. That came up many times during the debate, as did the vast majority of what he spoke about. It is really important to expand people’s imagination about where they can invest. It is not just about educating young people; it is about educating people in their 30s, 40s and 50s about where they can invest their money, particularly given what we are likely to hear in the Budget tomorrow. I would potentially be interested in having a conversation about where I can invest my money. Anyway, I do not have that much, so let us crack on with the debate.

Having listened to the speeches this afternoon and during our consideration of the Pension Schemes Bill, I know that there is an obvious consensus across the House on this issue. For one reason or another, pension schemes do not feel confident to invest directly into the UK equity market. The facts do not lie. Over the past 10 years, the proportion of private sector defined contribution assets being invested in the UK equity market has fallen from around 30% to 6%. In 2006, around 32% of defined benefit assets were invested in UK equities; by 2023, that had fallen below 2% in favour of UK gilts. As the Financial Times reported, even the Financial Conduct Authority’s own pension scheme invests only around 4% in UK equities.

These statistics are all the more stark when one considers that, from 2012, total global investment in equities from UK private sector workplace DC schemes has increased from 70% to 76%. It is not that pension schemes do not want to invest in equities, but something has changed that has made the UK equity market less attractive than others, and we need to figure out what has happened. I know that everyone in this Chamber agrees on that; indeed, we have heard some solutions during the debate.

The pensions investment review was a welcome first step in looking at this, and we are glad that many of the recommendations are now in the Pension Schemes Bill. I want to be clear that we support the spirit of the Mansion House accord, which expands on the Mansion House compact that the right hon. Member for Salisbury helped to introduce in 2023. It seeks to persuade those in charge of DC schemes to invest in UK equities, and we think that is reasonable.

However, the Minister will not be surprised to hear that we still do not support the reserve mandation powers in the Pension Schemes Bill. While we are behind the spirit of the measure, we cannot support something that goes against trustees’ fiduciary duties. As the Minister has said many times, better returns for members are what is most important, and we agree wholeheartedly with that. However, does forcing pension funds to invest in what the Government wants them to invest in yield the best returns for members? The answer is probably not. It is no wonder that the industry is so heavily opposed to these powers, and that we are yet to hear a convincing argument for their implementation. Perhaps the Minister will be able to provide a more convincing one.

It seems counterintuitive for the Government to secure the commitment that they did in the Mansion House accord, and only months later bring in this measure. What makes it more confusing is that the Minister said in a recent interview on the “Making Money” podcast,

“I don’t think I’m going to need to use that power…because I see the industry changing.”

What is the point, if industry is changing in the way the Government want? Would it not be better to work with industry and give it a chance to reach the target, instead of holding the sword of Damocles over its head?

Instead, we need to engage with the industry and acquire a better understanding of the barriers it faces. For example, has legislation created an unattractive environment? Have we been too willing to legislate following the Maxwell scandal? Have the UK’s regulators gone too far and over-interpreted legislation? Are they getting rid of reasonable risk in the market in the pursuit of perfection? What has changed in the market that has contributed to that decline? Do the unbundling rules in the markets in financial instruments directive mean that the UK has not got the necessary equity research or data capabilities to attract investment? These are the kinds of questions that need answering before we give the Government such sweeping powers. A doctor would not operate on a patient if they had not properly diagnosed their symptoms—that would be considered malpractice—so why are we trying to solve an important problem without really knowing what is causing it in the first place?

For those reasons, the Conservatives will be tabling an amendment to the Pension Schemes Bill to ask just that question. Our amendment will simply ask the Government to include in their report an analysis of the barriers that pension funds are facing from legislation, regulation and market behaviour. We think that it is essential to obtain, understand and resolve this information before even considering the introduction of mandation powers. We hope the Minister agrees and will see our proposal in the constructive manner in which it is intended. I would welcome his thoughts on it.

As I said at the beginning of my speech, there is much agreement on this wider issue and on the need to create an environment that will incentivise investment into the UK. I know the Minister understands that, and we want to work with him to improve the attractiveness of the UK’s equity market and reinvigorate pension funds’ appetite to invest in it. If we get this right, we could really make a difference. Now is the time to do the hard graft, to work together while this Government last and to make the UK the place to invest in again.

[Graham Stringer (in the Chair)]

We have caught up a lot of time. I ask the Minister to leave a couple of minutes for the Member in charge to wind up.

17:14

[The Parliamentary Secretary to the Treasury (Torsten Bell)]

It is a pleasure to serve under your chairship, Mr Stringer. I will indeed leave several minutes for the winding-up speech. Like everyone else, I begin by congratulating the right hon. Member for Salisbury (John Glen) on securing this debate, particularly on the Budget eve; it is very kind of him to make my diary relaxed. It is a topic on which he has thought deeply and that we have discussed many times. As ever, I welcome his constructive and practical approach, which befits someone who confirmed to me earlier that he holds the title of longest-serving Economic Secretary to the Treasury. Luckily, he was not on performance-related pay, given the growth of the economy during that time.

[John Glen]

I was not paid during that time.

[Torsten Bell]

He may not have been paid at all. His focus at the beginning of his remarks on growth and one of its key enablers, investment, was right. If we stepped back and forced ourselves to ask, “What is the one thing the British economy needs more of?”, it would be public and private investment. As several hon. Members have said, the UK has the second largest pension scheme in the world, worth £2 trillion. It is our largest source of domestic capital, underpinning not just the retirement we all—or at least most of us—look forward to, but the investment on which our future prosperity depends.

That is why this Government launched and concluded a review of pensions investment within a year of taking office. Those reforms are now being taken forward through the Pension Schemes Bill, as the hon. Member for South West Devon (Rebecca Smith) pointed out. First and foremost, the Bill includes measures to deliver bigger and better pension schemes in the DC market. It requires multi-employer defined contribution pension providers to hold at least £25 billion in assets by 2030 or to be on track to do so by 2035.

That requirement will drive scale and sophistication in workplace DC schemes so that they are better positioned to invest in a fuller range of asset classes, including specialist private markets such as venture capital, which we have not heard much about today but which are key. The biggest gap in UK capital markets is growth finance: the gap that holds back our science and tech start-ups, scale ups and pre-initial public offering companies. That does not take away from the challenges we are raising about public markets, but if we look at our capital markets as a whole, that is our biggest gap.

Pensions can be a key source of funding for those economically critical investments and sectors, which my hon. Friend the Member for Buckingham and Bletchley (Callum Anderson) set out, as he has done many times in the discussions on the Pension Schemes Bill. This is not just theoretical; it is actually starting to happen. Legal & General is investing in post-quantum cryptography and Nest is investing in energy generation. Last week, the Chancellor and I met with Aegon UK, NatWest Cushion and M&G, which have all confirmed that they will invest £200 million in the British Growth Partnership, a fund managed by the British Business Bank investing in cutting edge British businesses and building on British strengths in areas such as clean energy, advanced manufacturing and the medical technology that other Members have talked about in the past.

As we have heard, Members are well aware of the Mansion House accord, a voluntary commitment by 17 major DC funds to invest 10% of their main default funds in private assets by 2030, including 5% in UK private assets. That will boost investment across a range of asset classes, including growth market equities, which we have not touched on much today. That is welcome news driven by a focus on giving savers better returns and showing how pension funds can contribute directly to making Britain the best place to start up, scale up and ultimately list companies. I should emphasise that we should think about our capital markets as a ladder up which firms can climb. Our job is to make that climb easier, not just to focus on the ultimate destination.

Several Members raised the question of transparency. The Pension Schemes Bill includes a new framework under which DC funds will need to disclose their investments in more granular detail, including UK-overseas and asset class split. We will be able to see in more detail what individual schemes are doing. We are doing that so that we can measure their value for money. For the first time, we will be able to see where those funds are invested.

Finally, as Members know, the Bill includes a reserve power, which has been discussed today, to ensure that the change that the pension schemes themselves say is needed in the interest of members happens. I will repeat what I said on the “Making Money” podcast—it is very exciting that the hon. Member for South West Devon had time to tune in. I am confident that this power will not need to be used, given the progress the industry is already making. It is designed as a proportionate backstop to the commitments that the industry has already made, with strong safeguards to protect the interests of pension savers.

On mandation, I note—as gently as possible, given the excellent tone of this discussion—that I have spent much of the last six months hearing strong opposition to any mandation backstop while hearing, often from the very same people, language that does not directly contradict that, but gets close to calling for mandation, whether it is social housing, public equities or anything else. I just gently note that tension before as gently moving on to set out some of the wider steps that the Government are taking to support our capital markets, because they go far beyond pensions. It is important to note that although UK equity markets have faced some challenges in recent years, London’s markets remain some of the deepest and most liquid in the world. We want to build on those strong foundations and make the UK as attractive a destination as possible for companies to start, scale and stay. There is a danger here: we need to make sure we are having this discussion about the change we need to see, while also celebrating many of the real strengths that exist in London’s capital markets.

[Richard Tice]

Is the Minister aware that the quantity of listings on the London stock market has collapsed by about 80% in the last decade, and that the number of companies listed on AIM—the alternative investment market, which was the original growth market 40 years ago—has fallen to a 25-year low, so something fundamental is going wrong with our listed markets?

[Torsten Bell]

I am. I will just gently say that many people, when discussing the reasons for that, point to a policy of Brexit delivered without any ideas about how it should be delivered in a smaller, home market and without any plans for the future. I would probably pause on that before I started offering anyone views on anything at all.

My Treasury colleagues have already delivered an ambitious programme of reforms: modernising UK listing rules; establishing the private intermittent securities and capital exchange system—PISCES—to support private companies to scale and grow as a stepping-stone to public markets; and making it easier to raise capital and IPO in the UK with new prospectus rules from January of next year. To come directly and more fairly to the question that the hon. Member for Boston and Skegness (Richard Tice) raised, I think it is important to celebrate the fact that we have seen some of that translate into positive momentum recently. Hon. Members will know that the stock exchange has had a very strong year, outperforming most of the rest of the world. We saw listings from Fermi America and Shawbrook last month, and there are other exciting companies in the pipeline. I now regularly see my hon. and learned Friend the Economic Secretary to the Treasury in confetti-filled photographs from the stock exchange, and I look forward to seeing many more in the years to come. I encourage hon. Members to go and engage in similar activities.

Our capital markets are not just about celebration and ceremony; they are critical in connecting retail investors’ capital with businesses in the way that several hon. Members mentioned. Investing offers a powerful way for people to make their money work harder and share in growth. That is why the Government are bringing forward measures to get Britain investing again.

The right hon. Member for North West Hampshire (Kit Malthouse) raised a point, which I have heard him discuss before, about risk appetite and the incentives that people have. I would say that if we look at the evidence from the last 25 years, we see that it is not the strength of the incentive that is the issue. Many people holding cash ISAs would have made very significant returns if they had held that in equities instead. I will give an example. If someone, each year since the introduction of ISAs, had put £1,000 into an equity ISA rather than a cash ISA, they would be £50,000 better off. The issue is not purely about incentives, and I think focusing there would miss some of the wider changes we have been seeing, but I am always eager to hear about what more can be done.

What we are doing is working closely with the FCA and rolling out a scheme of targeted support ahead of ISA season next year. That will represent the biggest reform of the financial advice and guidance landscape—mentioned by the hon. Member for South West Devon—in more than a generation. It will revolutionise the support that consumers can receive to invest.

[Kit Malthouse]

I get the example that the Minister talks about, but I think he misunderstands or perhaps misappreciates how the retail investor thinks. They do not necessarily think, “If I put £1,000 in now, in 20 years’ time it will be worth this.” They think, “If I put £1,000 in now, what is my return going to be next year? What is my running return going to be?” And it will be a percentage return on the dividend. That is why we have a P/E—price-to-earnings—ratio for every share; that is what investors look at. If that is impaired because of taxation and the return is reduced, as it has been over the last few years, they will be less inclined to invest. That, fundamentally, is the pattern that we have seen. The Minister never says this, but in the end, people invest in listed stocks and shares, whether through their pension or otherwise, to make money. They are not doing it for the good of anybody else. They are doing it to make money, and if they are going to make less money, or the perception is that they will make less money, because of Government taxation, they will do less of it. Would he not agree?

[Torsten Bell]

I am not sure that I fully understood, so I am not going to commit to agreeing. Remember that the capital gains on shares in equity ISAs—investment ISAs—receive tax relief in their entirety, so the tax is not the problem in terms of people’s rates of return; the returns would have been very real indeed over, for example, that 25-year period. However, my basic argument is that we need better advice, and that our targeted changes will make it possible for financial firms to offer that.

We are also supporting an industry initiative to rebalance risk warnings to ensure that firms are offering consumers information about investing, not trying to scare them off with over-the-top warnings. Together, these measures will support savers in securing stronger returns over the long term because, as the right hon. Member for North West Hampshire just said, this is about making money for savers—whether in pension savings or elsewhere—putting money into people’s pockets and further strengthening our world-leading capital markets.

I will make one more substantive point and then conclude. This is not just about capital. In the end, the growth agenda, and needing the investment to make it happen, is about actual investment not just financial flows. Financial flows are an enabler of the investment that ultimately matters to the size of the capital stock, the quality of the infrastructure, the quality of the firms, and the amount of capital that workers have to work with. That is, in the end, what matters, and it means firms wanting to grow, which is why I focused slightly more in my remarks on the whole chain of firms’ access to capital.

This is also about being able to get out and actually get things built. I gently remind Members, when I hear them opposing anything getting built, anywhere, by anyone, at any time—I definitely hear the Lib Dem Front Bench opposing—[Interruption.] I am not talking about the hon. Member for Torbay (Steve Darling), but the Lib Dems have never seen a house that they wanted to be built. That is my lived experience of sitting in the Chamber day after day. We need to actually get things built, and as I said, I agree with the hon. Member for Carshalton and Wallington (Bobby Dean) on the pipeline of investment. That is ultimately what we need if we want growth to happen; it cannot just be about changing the flows of existing assets.

I once again thank the right hon. Member for Salisbury for securing today’s debate. A strong pensions industry and thriving capital markets are cornerstones of our capitalism, as I think everybody in this Chamber agrees. We are introducing significant reforms of both the capital markets and the pensions industry, and I am grateful to have had the chance to discuss them this afternoon.

16:04

[John Glen]

I thank the Minister for his response. I think there has been a lot of common ground across the Chamber this afternoon, but in some areas we have not quite bottomed out what the Government’s view is about empowered pension fundholders electing to discern what amount of their pension should be invested in UK equities. We have to continue that conversation. I thank my hon. Friend the Member for South West Devon (Rebecca Smith) for clearly setting out our party’s position on the Pension Schemes Bill; I agreed with her very much.

I acknowledge the contributions of the hon. Members for Buckingham and Bletchley (Callum Anderson) and for Torbay (Steve Darling), my right hon. Friend the Member for North West Hampshire (Kit Malthouse), the hon. Member for Boston and Skegness (Richard Tice), and my friend the hon. Member for Carshalton and Wallington (Bobby Dean). I respectfully say to the hon. Member for Boston and Skegness that when I was a Minister and I did the capital markets review, the Jonathan Hill review and the Mark Austin review, I did not just passively sit there; I went to the City, listened to people like him who were practitioners in the City in different funds, and worked with my officials to deliver what the City wanted, to optimise the pathway that we were in.

That goes down to having deep conversations about which regulations need to be moderated and which need to be withdrawn, such that the Hill review—and this Government have enacted everything that came from it—still leaves me with a sense of frustration, because there was nothing that I would not do that I was asked to do in the interests of London. To believe that somehow we set up four working groups and have a big bang like 1986 or something, and that it will all be straightforward, I think is mistaken. It is a complicated ecosystem, and we will need to look at the risk profile. I probably agree with the hon. Gentleman that there needs to be a greater appetite for risk. We have to reset that risk appetite, because we have had a dozen years since the reset after the global financial crisis, and we need to look at it again. I do think the PRA needs to be challenged, as I think it will be next week by the Financial Policy Committee, on some of the issues around what level of capital it is prepared for banks to have, which is a good place to start.

I am very encouraged by the constructive nature of the conversation this afternoon. I hope that the Minister will reflect a little more on the need to empower pension holders to take decisions in the interest of investing more in UK equities.

16:04

Motion lapsed, and sitting adjourned without Question put (Standing Order No. 10(14)).