UK Pension Funds' Overseas Focus: A £60bn Misallocation Problem

British savers are funding American technology giants whilst domestic firms starve for capital, and the taxpayer is footing the bill. A dramatic collapse in pension fund investment—from over half of assets in UK equities three decades ago to as little as 4% today—has created an extraordinary situation where overseas pension funds now invest more in British private assets than UK schemes do. The question facing policymakers is whether this can be reversed without legislation, or whether decades of investment orthodoxy must be overridden by political force.

A radical proposal for domestic investment

Charles Hall, Head of Research at Peel Hunt, is among a growing chorus of City voices arguing for a dramatic reversal. In a recent letter to the Chancellor signed by over 300 business leaders, from startup founders to FTSE 100 chiefs, Hall and his co-signatories called for UK pension schemes to commit a minimum 25 per cent of default fund assets to domestic investments. The target would apply specifically to defined contribution pensions, which have ballooned to approximately £650 billion since auto-enrolment began in 2012.

The proposal goes considerably further than the government's own Mansion House Accord, which merely commits schemes to invest 5 per cent in UK assets by 2030. That gap—between 5 per cent and 25 per cent—represents hundreds of billions of pounds that could flow into British businesses rather than foreign markets.

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The £60bn question

What makes this more than a technical investment debate is the scale of public subsidy involved. According to Hall's analysis, the UK taxpayer contributes roughly £60 billion annually to pension schemes through tax relief. British workers are effectively receiving state support to fund American technology giants whilst domestic firms struggle to raise capital at home.

The UK taxpayer contributes roughly £60 billion annually to pension schemes through tax relief—effectively providing state support to fund American technology giants whilst domestic firms struggle to raise capital at home.

The situation has become sufficiently perverse that overseas pension funds now invest more in UK private assets than British schemes do. Canadian and Australian pension funds, amongst others, have built substantial portfolios of British infrastructure and growth companies—the very assets that UK schemes have been systematically selling.

Auto-enrolment defined contribution pensions present a particularly stark example. These portfolios are relatively young, with many savers decades away from retirement, yet their equity allocations tilt heavily toward US mega-cap stocks. The risk profile is not as conservative as it appears. Concentration in a handful of American technology companies creates both currency exposure and single-market risk, precisely the vulnerabilities that diversification is meant to address.

Political momentum meets fiduciary duty

The debate has moved beyond City seminar rooms. Reform UK's proposal for a British Sovereign Wealth Fund built from pooled local government pensions has thrust the issue into mainstream politics, even if the policy detail remains sketchy. What's striking is how the political spectrum seems to be converging on the diagnosis, if not yet the prescription: British pension capital has decoupled from the British economy.

Local government pension schemes, worth approximately £450 billion combined, illustrate the scale of the disconnect. Recent data shows these funds allocate just 7 per cent to UK equities, 5 per cent to UK infrastructure, and a mere 1.5 per cent to UK private equity. Given that these schemes are ultimately backstopped by local taxpayers, the case for domestic allocation carries particular force.

But mandating where pension trustees must invest raises thorny questions of fiduciary duty. Trustees are legally obliged to act in the best financial interests of scheme members, not to support industrial policy or national champions. The counter-argument—advanced by Hall and others—is that home bias is not inherently detrimental to returns, particularly when combined with scale and sophisticated asset allocation.

British pension capital has decoupled from the British economy, with local government pension schemes allocating just 7% to UK equities, 5% to UK infrastructure, and a mere 1.5% to UK private equity.

The proposal attempts to navigate this tension by focusing on default funds whilst preserving individual choice. Savers who wished to avoid the 25 per cent UK allocation could opt out without losing pension entitlements. Whether this construction would satisfy legal and regulatory scrutiny is unclear. If voluntary adoption proves insufficient, Hall acknowledges that mandation "remains an option"—a signal that patience in some quarters is wearing thin.

Scale and sophistication

One element of the reform push commands broad agreement: the UK pension landscape is excessively fragmented. Scale matters in institutional investment. Larger funds can negotiate better fees, access private markets more effectively, and employ specialist teams across asset classes. The proliferation of small schemes has contributed to both high costs and conservative asset allocation.

Consolidation could address this without necessarily changing investment mandates. Creating "superfunds" in both the defined benefit and defined contribution markets would enhance returns through cost savings and improved access, regardless of domestic allocation targets.

Hall's assertion that Britain lacks not innovation but capital finds some support in venture data. The UK has indeed produced more than 200 companies that reached unicorn valuations, though a significant proportion have since relocated or been acquired by overseas buyers. That leakage—of both companies and returns—compounds the capital drain.

The Mansion House Accord, announced last year, represents the government's current position. Its 5 per cent UK allocation target by 2030 is explicitly modest, designed to be achievable without triggering legal challenges or capital flight. The gap between that ambition and the 25 per cent target proposed by industry figures will define the political battleground over the next parliamentary term.

Whether British pension capital can be redirected at scale without legislation is the question facing Rachel Reeves and her successors. The alternative—continuing to subsidise the growth of foreign companies whilst UK markets languish—is becoming increasingly difficult to defend, both economically and politically. The intellectual case for change has been made. What remains uncertain is whether the political will exists to override decades of investment orthodoxy.

More articles by Ross Williams