Pension Schemes Require Carrots, Not Sticks, to Support UK Growth
Monday 20 April 2026 1:37 pm | Updated: Monday 20 April 2026 1:38 pm. The Pensions Scheme Bill, currently under parliamentary review, aims to grant the government authority to direct pension schemes on where to invest. However, Richard Stone argues that such mandates often backfire, advocating instead for incentive-based approaches to foster domestic investment.
The Government's Push for Domestic Investment
The government contends that UK pension schemes are underinvesting in domestic equities, private assets, and infrastructure, which could stimulate economic growth. With pension funds lagging behind international peers in domestic allocations, these sizable pots represent a potential capital source for growth initiatives. Most workers invest passively through workplace default funds, focusing on global markets, unaware of legislative changes that could dictate their pension allocations.
Interventionist Policies Cross a Critical Line
Mandating investment decisions breaches the fiduciary duty of pension trustees, who must act in beneficiaries' best interests. Forcing investments against their judgment compromises this principle, sparking opposition from the pensions industry. The House of Lords removed mandation powers from the bill, but the government has reinstated them, leading to ongoing parliamentary disputes. This approach misses an opportunity to leverage incentives that could benefit both pension holders and public finances.
Learning from Global Leaders Like Australia
Countries such as Australia demonstrate success with large superannuation schemes and engaged publics through incentive models. Instead of compulsion, the UK could adopt similar strategies to encourage trustees to favor UK assets. Incentives preserve trustee independence, ensuring decisions align with beneficiary interests without undermining their role.
Tax-Based Incentives as a Solution
One effective method involves using the tax system to nudge behavior. For instance, taxing dividends from foreign investments or funds with low UK weightings could improve returns on domestic assets. Australia employs tax credits on domestic dividends, encouraging local investment. Implementing charges on foreign dividends could boost domestic allocations while generating revenue for strained public finances. This approach avoids turning the government into a pension asset manager, maintaining system integrity.
Conclusion: Prioritize Encouragement Over Compulsion
The government should withdraw mandation proposals and explore incentive-based measures to achieve desired investment behaviors. This strategy is more likely to succeed without eroding the fiduciary principles central to the pension system. Richard Stone, chief executive of the Association of Investment Companies (AIC), emphasizes that incentives, not mandates, are key to driving growth through pension investments.
