By Rt Hon John Glen MP

We are exceptionally strong at collectivising assets in this country, but we have failed to address the broken links in the investment chain that links UK savers with UK society. This chain is intended not only to provide security in retirement, but to channel assets towards improving the places that pensioners retire in and growing the businesses that serve them.

Over the past 25 years, allocation to UK equities by UK pension funds has fallen from more than 50% to 4.4%. This is far below the 13% global average and represents active disinvestment from UK plc rather than neutral portfolio optimisation. 

The UK currently has one of the largest pools of investable capital in the OECD at £5.5tn, but has incredibly low relative levels of investment compared to its peers. A large chunk of that investment capital is held in the name of UK citizens within pension scheme assets. UK Defined Contribution schemes are set to grow from around £500 billion in 2021 to £1 trillion by 2030, with £1 trillion already held in Defined Benefit legacy schemes. 

Katherine Braddick, who will be taking up the reigns as the new Chief Exec of the Prudential Regulation Authority from the departing Sam Woods, will arrive with the Pension Schemes Bill likely enshrined in law, but with an awful lot still on her to do list to move the dial on UK economic growth and security for pensioners.

Let me first be clear, there is no villain within the system. It is the system itself which has been designed as a patchwork, safetyist straightjacket in the period after the Global Financial Crisis that has created a siloed, defensive way of thinking. It is focused on cost-over-value and on short-term risk that ties the hands of asset allocators and allows pensioners’ capital to pool in areas that fail to benefit their society. 

This means, as many well-respected think-tanks like New Capital Consensus have pointed out, that it will take collaborative redesign between the PRA, Government and industry to change it.

A UK Productivity Index

Firstly, they must tackle the index-mindset that pervades asset allocation currently. The easiest thing to do for a fund manager is to park pensions in a passive index like the MSCI Global. Any UK pension funds invested in this particular index will invest more capital on any given day to Apple Inc. than the entirety of the UK economy combined. And whilst some indexes perform well, concentration of our pensioners’ assets in 6 or 7 US tech stocks creates a systemic risk in and of itself, in addition to assisting these companies in buying up our own innovative UK firms. 

What the Government and PRA can do to combat this is create the UK’s own productivity index linked to a national industrial and corporate growth strategy. 

A UK Productivity Index would reframe patriotic investment as enlightened fiduciary practice and provide firms linked to a long-term vision for the UK with an incentive to maintain productive practices in order to stay within the Index and gain access to greater volumes of capital. 

The challenge for Braddick will be to shift regulatory emphasis from narrow cost focus toward net returns and member outcomes - including the health of the UK economy.

A New Approach to Risk

Secondly, the system must recognise that the nature of “risk” is not homogenous, and must not continue to conflate short-term and long-term risk in investment decisions. 

Pensions are naturally long-term investment vehicles that have a time horizon that allows for illiquid, ‘patient’ capital to deploy to purposeful companies and projects. But our risk mindset in this country is currently out of kilter with our productive ambitions. 

The UK’s prevailing regulatory approaches are based on strict mark-to-market accounting and one-year risk measurement. These naturally push institutional investors towards highly liquid, low-volatility assets, anchoring massive capital pools in government debt at the expense of potentially illiquid but higher-value investments like infrastructure, technology, and growth businesses which create jobs and improve qual ity of life.

Canadian, Dutch, and Australian pension and public funds routinely allocate 10–20% or more of portfolios to private equity, infrastructure, and direct growth investments. UK pension funds invest only a small fraction in these asset classes—often under 5%. It is this cultural switch towards the long-term benefit for members and our society, away from short-term focus on market volatility that may be one of the most challenging tasks for the incoming PRA chief. 

Regulating SuperFunds

Thirdly, the establishment of new DB pension Superfunds in order to allow the consolidation of smaller pots is a powerful tool to encourage intelligent investment allocation with the expertise that will come with the benefits of scale. This will operationalise some of the £1bn in legacy DB schemes that traditionally seek ‘safe havens’ with insurance companies buying them out. 

Solvency UK regulations form very tight straightjackets around insurance companies and, as such, mean they are subject to daily liquidity requirements and accounting standards that simply do not make sense for long-term investable capital with differing time-horizons. These regulations often result in assets draining offshore, pooling in areas that are unproductive for the UK economy, or a greater reliance on debt over equity.

Superfunds have the potential to provide a more productive alternative to insurance buy-out if they are regulated like traditional DB schemes in order to give them freedom to invest in a wider set of assets. However, the PRA and Government must also ensure that current Gateway rules are modified to enable Superfunds to operate as a part of the market mix rather than a bridge-to-buyout warehouse. 

A UK-Champion Life Insurer

But what also needs to be determined in the near future by the new PRA chief is whether life insurers themselves should be allowed to create SuperFunds outside of their Solvency UK regulatory ring-fences. The emergence of a UK-Champion Life Insurer with the power to invest long-term in illiquid assets that directly benefits the UK economy would recognize the role that life insurers play in the nexus of British savings-investments and restructure balance sheets away from defensive, fixed-income heavy portfolios. 

A UK-based life company that pools long-dated retirement promises at scale, holds legally binding obligations to UK households over a horizon of decades, and translates those obligations into sustained, prudently managed investment into SMEs, social housing, energy projects and infrastructure could not only boost UK growth, but mend the social contract between savers and the societies they live in. Restoring pride in the social function that the investment system represents. 

Protecting Pensioners and the Places They Retire In

Ultimately, the role of any PRA chief is to protect the pensions of beneficiaries whose money-managers they regulate. But unless both regulators and Government can recognise the need to address the institutional disinvestment from UK plc and ensure that savers’ money is going towards protecting and improving the places they are most likely to retire in, the businesses they rely on and the infrastructure that surrounds them, they are doing only half a job.