A debate about a perceived under-investment by the £3trn UK pension sector in British companies has been ongoing since early 2023. Pension funds already invest around £1trn– a third of their total assets – in the UK, with a large share going into government bonds, which help fund public services, and also to corporate bonds, public and private equity and property.
Through its Pensions Investment Review, the Government is currently exploring how the pension system might support greater investment in the UK, particularly in private markets. It is essential pension funds maintain the freedom to take investment decisions that meet the needs of scheme members and savers. As pension professionals gather this week in Liverpool for the PLSA’s Annual Conference, the largest event of its type in the UK, the Association has proposed a range of investment and fiscal incentives which the Government could deploy to encourage greater flows of pension investment into the UK.
Pensions and Growth: Investment and Fiscal Incentives to Encourage the Flow of Pensions Assets into UK Investment was written in collaboration with Sarah Gordon, Visiting Professor in Practice at the London School of Economics’ Grantham Research Institute on climate and the environment. The recommendations build on previous PLSA work which identified a range of policy interventions which might encourage DC and open DB schemes, in particular, to invest more in UK assets. The PLSA’s recommendations:
Investment incentives
1. Make greater use of blended finance.
2. Expand the already successful
Long-term Investment for Technology and Science (LIFTS) initiative.
3. Government commitments on large-scale infrastructure projects could include guarantees.
4. The capital behind the National Wealth Fund (NWF) and British Business Bank could act as a government-backed provider of liquidity. Current plans to establish the NWF should be expanded to create a suitable vehicle to attract pension investment at scale.
5. Co-investment vehicles with British Patient Capital.
Fiscal incentives
6. Reduce the effective tax rate for pensions in holding UK shares by allowing a tax credit on dividend payments as has been successfully done in Australia.
7. The issue of stamp duty needs addressing. When pension funds buy UK shares, they have to pay Stamp Duty whereas if they buy shares from other countries they are often not subject to taxation.
8. Pensions could benefit from a discount in their Pension Levy if they invest in certain sectors or locations.
9. Investment into the National Wealth Fund could be provided with a fiscal incentive, possibly modelled on those used for venture capital trusts (VCTs) and Seed Enterprise Investment Scheme (SEIS).
10. Incentives could be provided for Net Zero, sector or regionally based investment.
As the PLSA has previously argued, implementing wider reforms to increase investment by UK pension funds, including changes to the regulatory framework, enabling consolidation of pension funds, and focusing on performance and value for money, should be a large part of a broad strategy.
Nigel Peaple, Chief Policy Counsel at the PLSA, said: “There are many levers the Government can pull to catalyse pension fund investment in the UK. Well-designed investment and fiscal incentives, focused on creating long-term value for pension savers, have the potential to swing UK assets back into favour versus similar opportunities globally. Looking overseas, it is no coincidence that a country such as Australia, which has a clear fiscal incentive for investing in the local economy in the form of a generous dividend tax regime, also has one of the highest pension asset allocations to domestic shares. We ask the Government to back its UK growth mission with a bold and creative stance on pension fund investment that will work for UK pension savers.”
Pensions and Growth: Investment and Fiscal Incentives to Encourage the Flow of Pensions Assets into UK Investment.
The PLSA’s latest report follows the publication of
Pensions & Growth: Creating a Pipeline of Investable UK Opportunities in August, which identified practical solutions for making UK growth assets more investable for pension funds.
