Pension Investment in UK Equities

John Glen Excerpts

Tuesday 25th November 2025 Westminster Hall

[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—]

--- Later in debate ---

[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.

--- Later in debate ---

[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.