The Chancellor faces a critical decision that could reshape how British pension savers invest their money, with a controversial proposal to mandate UK equity investments gaining traction ahead of her upcoming announcement.
In just two weeks, the government will reveal its plans for pension reforms that have kept savers and investors in suspense. While much attention has focused on potential cuts to tax-free lump sums or higher National Insurance on salary sacrifice arrangements, another policy could fundamentally change investment strategies.
The £100bn Question: Mandatory UK Investment
One less-discussed but significant proposal would force pension schemes to allocate a fixed percentage of their assets to UK companies. LSEG chief executive David Schwimmer has highlighted that if defined contribution pension schemes directed just 25 percent of their assets to domestic equities, it could inject up to £100bn into the UK market.
While the headline figure appears tempting for a government seeking to boost British business, financial experts warn this compulsory approach carries substantial risks for ordinary savers. Rather than strengthening retirement outcomes, it could undermine them by limiting diversification and forcing investment decisions that might not align with members' best interests.
Why Forcing Investment Could Backfire
Michael Healy, UK Managing Director of IG, argues that the relatively low exposure of UK pension funds to domestic equities reflects broader market realities rather than any moral failing by fund managers. The core issue isn't investor disloyalty but rather the UK market's failure to grow sufficiently to attract natural investment.
A mandatory approach risks several negative consequences: weaker retirement outcomes for savers overexposed to a single market, diminished confidence in the pension system, and damage to the voluntary investment culture the Chancellor claims to want to foster.
Confidence in markets builds when investors have genuine choice, not when options are removed. Compulsory investment could actually reduce enthusiasm for supporting UK companies through other channels if savers feel cornered into backing British firms against their will.
A Better Way: Incentives Over Mandates
There's a more effective approach to encouraging pension investment in UK companies: reward savers rather than forcing them. The government could require every pension provider to offer a UK-focused fund option accompanied by enhanced tax relief on contributions.
This voluntary method would nudge people toward supporting domestic businesses while preserving investor choice and autonomy. It empowers savers to make conscious decisions about backing British companies rather than being compelled to do so.
If the Chancellor genuinely wants to make UK markets more attractive to both institutional and retail investors, she should start with the simplest reform available: abolishing stamp duty on share purchases. This outdated tax creates friction for every transaction and immediately makes UK equities less competitive compared to international alternatives.
Removing this barrier would send a powerful message that Britain wants to reward investment in its companies rather than penalising it. The ultimate goal should be creating markets so dynamic and rewarding that capital naturally chooses to remain in the UK.
Forcing pension money into domestic shares might provide a short-term boost, but it won't address the underlying challenges facing the UK market. Policies that make investing in Britain an attractive opportunity rather than an obligation represent the only sustainable path to rebuilding the UK stock market and creating the robust investment culture the government desires.
