I wish I’d put it as well as this man has
I’d wish I’d put it as well as this woman has
UK businesses are facing many headwinds, but revitalising economic growth can help them overcome barriers to successful expansion. This will require higher long-term investment in infrastructure, housing, alternative energy, scale-up companies and modern technologies, without which corporate dynamism and growth will remain elusive.
Government policy seeks to increase spending on social benefits, the NHS and public services, to improve lives for many. However, paying for these, given the country’s fiscal deficit, has necessitated tax rises in the last two Budgets – and these will actually reduce economic activity and have been damaging to business confidence.
Baroness Ros Altmann, former UK Pensions Minister
Of course, the impacts of the pandemic, higher energy costs and Brexit have hit public finances, so the Chancellor does not have unlimited spending powers. But tightening fiscal policy will not revive business prospects, especially as monetary policy is also relatively tight, because the Bank of England’s Quantitative Tightening program pushes up bond yields, which offsets reduced short-term interest rates.
British businesses want and need more long-term capital – preferably equity rather than just more debt. Government cannot provide sufficient funding but there is no need to despair. There is a potential solution waiting to be grasped, that could bring in billions of pounds of long-term capital, at no extra Exchequer cost.
Government could harness the power of pension assets as the game-changer that British businesses need to kick-start a new era of growth.
A radical change to the way the UK’s generous pension tax reliefs operate, could revive the flow of long-term investment capital. Recent figures show taxpayers spend around £80 billion a year on tax and National Insurance reliefs, to help people build private pensions. These are enormous sums, yet not a penny has to be invested here. And most of the money is used to buy overseas assets, which help boost other countries and not Britain.
If the Government were to require at least, say, 25% of all new pension contributions to be invested in UK assets, such as equities, real estate, infrastructure or small and unlisted companies, as a condition of receiving the taxpayer contribution to pensions, billions more could begin flowing into UK markets again.
This could help unwind the doom loop that has engulfed British equity markets. As UK pension funds have pulled out of equity markets in general and UK equities in particular, London Stock Markets have suffered lower trading volumes, reduced capital flows and higher corporate funding costs. Many good British companies have felt forced to buyback their own shares and increase dividends, instead of investing to expand or modernise their business operations. British companies have suffered a significant relative de-rating, higher corporate funding costs and many great businesses being snapped up on the cheap or moving abroad.
Instead of backing Britain, our pension investors have consistently reduced UK holdings, in an apparent vote of ‘no confidence’ in Britain. Over the past 20 years or so, most private pension funds have cut equity exposure from over 70% with most in UK markets, to below 20%, with only a small allocation to UK equities. Meanwhile, average bond exposure has increased from around 20% to over 70%.
The UK is a global outlier, as other major countries’ pension funds have significant overweightings in their home markets, including Australia and Japan with around 30% of their portfolios in domestic stocks.
By requiring at least a quarter of all new contributions to be invested in Britain, in exchange for the tax reliefs, the Government would be using existing expenditure to incentivise a nationally vital policy objective. Despite expressed concerns about fiduciary duty from many multi-national and passive fund management houses, there is clear justification for such a policy of incentivisation rather than mandation.
Pension funds will not be forced to increase UK exposure. If trustees or managers wish to invest more than 75% overseas, they can still do so, but they would not have the tax reliefs added to contributions. It is their choice, but of course it would also change the assessment of forecast future returns.
Most trustees or individuals would realise that the generous reliefs should more than outweigh any forecast UK underperformance over time. And the adoption of environmental, social and governance (ESG) restrictions on pension portfolios are not justified by short-term performance considerations, but are considered to protect against future problems. Equally, by reviving the regular flow of long-term pension assets into UK assets, trustees would be helping their members ultimately live in a better country in retirement.
Such reform could usher in a new dawn for British businesses, boosting our markets, investment and growth. This could be a win-win for the country, setting up a virtuous circle to reverse the doom loop of pension fund selling. A re-rating of UK assets can reduce corporate funding costs and attracting long-term investment capital from other investors.
What’s not to like?
Baroness Ros Altmann is an economic, investment and pensions policy adviser and former UK Pensions Minister
Of course the other way of looking at it, which I did when we moved away from 100% UK equity exposure in the 2000s, is that by increasing our overseas assets we were seeking to harness the efforts of the Wallmarts, GE, and Pfizers to pay the pensions of our UK pensioners in 40 years time. Looking at the population dynamics, I doubted the capacity of a shrinking UK working population to support an ever expanding UK pensioner population. At the time however we restricted our US exposure to 25% of equities.
In making our decision we were thinking of genuine liability driven investment seeking to match the cash inflows (in terms of dividends) to match our future liabilities – the pension payments over the lifespan of our members. We were not diverted by consideration of current total market value or worse still regulated valuation assumptions masquerading as liabilities..
2 out of 3 ain’t bad!
Walmart and the three GE companies have done very well over the last twenty years; Pfizer less well.
I’m not sure trustees always make the best asset allocation decisions, PO.
The “old” Stagecoach trustees (before John Hamilton joined in 2000 and to be distinguished from the “new” Stagecoach trustees who’ve led the recent negotiations with Aberdeen) used to say and believe things like:
“The US markets are overvalued, so let’s encourage our managers to invest in UK (for higher dividends), overweight UK small cap (when Stagecoach was one), invest in Europe ex UK (as we expected to be using the Euro one day) and emerging markets, and commit 25% to private markets and infrastructure (where Stagecoach had obtained placing capital and later had infrastructure partners).”
We didn’t lose money by these calls, but we didn’t make as much money as we might have.
We had appointed our first global manager as early as 1992, but it was only after John Hamilton joined that we left asset allocation judgments to our equity and multi-asset managers.
As trustees, we retreated to just making manager allocation decisions.
Help me out. There is a phrase in the post: “taxpayers spend around £80 billion a year on tax and National Insurance reliefs.”
Please define the word “spend”. Is it the equivalent of what we call “tax expenditures” in the States? In the states, a tax expenditure is the tax revenue foregone because we don’t CURRENTLY tax certain income (where it may only be a deferral, not an exemption, so that the tax would be paid later). And, if it is equivalent to a tax expenditure, does the tax expenditure become taxable income when it is received as retirement income?
Or, is “spend”? Is the UK actually collecting tax from some taxpayers and spending it by making contributions to retirement savings for others? Here in the States, we now have something called a “Savers Match”, where we tax some people (actually, no one pays the tax today, instead, we plan to tax future generations by running $1 to $2 Trillion a year in deficits, adding $28 Trillion to our national debt over the past 15 years) to provide a contribution to lower income American workers retirement accounts.
So, is it a foregone or deferred tax (an “expenditure”, taxes we could have collected but decided to exclude certain items from taxation) or is it a transfer of taxes from some taxpayers to others (comparable to our “Savers Match”)?
Yes, BJ, you are quite right.
There are said to be about 1,200 tax reliefs in the UK tax system.
But HMRC (our IRS) has costed only about a third of them.
Because they aren’t treated as government spending, they escape some of the scrutiny public spending attracts.
This is despite the fact that they “cost” a significant amount of public money which would otherwise be reflected in higher tax revenues.
We have only a very few “reliefs” where actual spending is added to savings pots.
Henry has highlighted this, and the tardiness with which government pays its top up, more than once on this series of blogs.
henrytapper.com/2025/04/21/hmrc-boast-their-negligence-to-the-vulnerable-theyve-overcharged-for-pensions/
In the states, if you direct the investments of participant retirement assets, you have a fiduciary duty to act solely in their best interests. Fifty years ago, we had a debate over social investing of pension assets when certain multiemployer pension plans wanted to invest in industries where the union members themselves worked. We had a challenge in individual account plans where there was a substantial amount of assets allocated to employer common stock (ENRON, anyone?)
More recently, we are still having a debate over investing with an eye on ESG. Today, we are also struggling with private investments, equities and credit.
In the states, per a 1974 law, ERISA, retirement plan fiduciaries are subject to both civil and criminal liability, including incarceration in extreme cases, whenever they do not make prudent, informed investment decisions solely in the best interest of the retirement plan participants. See: https://www.psca.org/news/psca-news/2025/7/mep-fraud-owes-taxes-on-his-theft-tax-court-finds/
However, under certain circumstances, ERISA allows a fiduciary to delegate, with certain guardrails, investment duties and responsibility to individual participants. In those plans, well in excess of 95+% of all retirement savings assets in participant directed accounts are in US equities and debt and capital preservation investments.