The Government's pension investment plans risk undermining confidence in long-term saving

While the intention is to encourage investment in the domestic economy and support long-term growth, the proposal raises an important question: should retirement savings be used to deliver wider economic policy objectives?

For businesses, pension providers and millions of pension savers, the answer matters. Confidence is one of the foundations of successful retirement saving. Any perception that investment decisions are being driven by political priorities rather than members’ financial interests could have unintended consequences for participation, saving behaviour and trust in the pensions system.

Why confidence matters

Defined contribution pensions have become the primary way many people save for retirement. Employees and employers contribute to an investment pot, which is managed over time with the aim of delivering the best possible retirement outcome based on an individual’s circumstances and risk profile.

Tomm Adams, Partner, explains:

Mandating that a percentage of pension investments must be made into UK assets risks damaging confidence in long-term retirement saving. One of the core principles of defined contribution (DC) pensions is that retirement savings should be invested primarily in pension members’ best financial interests, not broader political or industrial policy objectives

The success of automatic enrolment has relied heavily on trust. Most pension members remain invested in default funds, confident that providers are making decisions designed to maximise long-term returns within appropriate levels of risk.

A DC pension is a type of pension scheme that builds up a pot of money via contributions from its members (and often their employers). This is then invested by the pension provider to increase its value. DC pensions work because members can either manage their investments according to their own risk appetite and preferences, or else invest in default options where they can trust that their retirement savings are professionally invested by the provider in their interests above all else. Damaging that trust risks discouraging retirement saving.

A wider policy question

The Government should be cautious about moving towards a system where pension savings become a tool of industrial policy. Pension assets should not be a source of capital that governments redirect to support national economic objectives if doing so compromises pension members’ retirement outcomes.

Even if the proposed powers are intended only as a safeguard, they could establish a broader precedent for future governments.

While these reserve powers may only be a backstop today, they create a precedent that should concern pension savers, employers and trustees alike. Future governments could use the powers created by this proposal in ways that go significantly further than currently intended.

The challenge facing UK retirement saving

The debate comes at a time when the UK’s retirement savings picture is already under pressure.

Recent HMRC data shows that personal pension contributions have increased in value, rising by £2.97 billion between the 2022/23 and 2024/25 tax years to reach £15.91 billion. At the same time, the number of people making personal pension contributions has fallen by around 450,000 to 6.4 million.

This suggests there are fewer pension members, but they are making higher contributions, partly as a result of inflation – unless this is entirely offset by much higher employer-funded contributions which are excluded from HMRC’s dataset, or an increase in use of salary sacrifice, this is a worrying sign for the health of UK retirement savings.

The figures suggest that while some individuals are increasing their contributions, fewer people are actively saving into pensions. Against this backdrop, maintaining public confidence in long-term retirement saving becomes even more important.

The UK is woefully behind the EU and Organisation for Economic Co-operation and Development (OECD) average in terms of retirement provision both through state pension and autoenrollment – there needs to be an expectation set that individuals, ideally supported by their employers, save more than the statutory amounts which do not provide an adequate retirement.

Supporting UK investment without weakening trust

If the Government wishes to support greater investment into UK assets, there are more proportionate ways of doing so, such as more tax incentives for voluntary medium-term investment in UK assets that support national growth goals.

Incentives that encourage voluntary investment can help direct capital towards priority sectors while preserving the principle that pension investments should ultimately be made in savers’ best interests.

For employers, pension providers and advisers, clarity and consistency from government remain essential. Mixed messages around pension policy risk undermining efforts to encourage individuals to save more for retirement at a time when greater retirement provision is already needed.

Tomm concludes:

To achieve this, the Government needs to have consistent messaging in encouraging long-term saving against the backdrop of economic uncertainty, rather than fiscal and now investment policy confusing the issue

What should businesses and individuals consider next?

While the proposals are still developing, employers, trustees and pension savers should monitor how the policy evolves and consider its potential implications.

Key actions include:

Employers: Continue to encourage workplace pension engagement and ensure employees understand the long-term value of retirement saving beyond minimum auto-enrolment requirements.

Pension trustees and providers: Review governance arrangements and stay informed about any changes that could affect investment strategy or fiduciary responsibilities.

Individuals: Regularly review pension contributions and investment choices to ensure they remain aligned with long-term retirement objectives, rather than relying solely on statutory minimum contributions.

Businesses and advisers: Keep abreast of future consultations and legislative developments, as any changes to pension investment rules could have wider implications for retirement planning, employee benefits and investment governance.

Would you like to know more?

If you have any questions about the above, please get it touch with your usual Blick Rothenberg contact or Tomm using the form below.