The carrot, not the stick, will get pension savers to support British companies

If we want to encourage pension savers to support the UK, we must reward them for doing so, says Michael Healy

In two weeks, the Chancellor will finally put pension fund savers out of their misery and reveal the kind of raid he is planning. Much of the negative reaction focused on reports of cuts to tax-free benefits or higher national insurance at the expense of wages. Both would sanction responsible investors at a time when the UK desperately needs more, not less, investment for the future.

Another less discussed policy that is gaining traction is a potential mandate forcing pension schemes to maintain some of their assets in UK equities. The move will have support – LSEG boss David Schwimmer recently noted that the UK’s 25 per cent allocation in a defined contribution scheme could inject up to £100bn into the domestic market. It’s a tempting title, but it carries real risks for savers.

At first glance, this idea seems patriotic – channeling more pension funds to British companies. In reality, this was a serious misstep. Forcing savers to support domestic companies would risk weakening pension returns, undermining confidence and undermining the culture of voluntary investment the Chancellor wants to foster. Moral failure

Moral failure?

Yes, UK pension funds have relatively low exposure to domestic equities. But this simply reflects the UK’s global market share and the long-term trend towards diversification, not the moral failings of fund managers. Mandating UK investment does not serve the larger purpose. The problem is not that investors are turning away from Britain because of disloyalty. This is because the UK market has not grown fast enough to attract them. The government should not force people to support the UK, the government should make the UK worth reinvesting in. A truly successful market is one in which domestic participation is high because investors want to get involved, not because they are told to.

The £100 billion figure shows why a mandate might seem attractive at first glance. But mandatory investment could leave many savers feeling too exposed to the UK against their wishes, which in turn risks dampening enthusiasm for investing in UK companies through other channels. Confidence is built by giving choices, not taking them away.

There is also a better way to encourage pension savers to support the UK – rewarding them for doing so. Rather than requiring UK equity exposure, the government should require every pension provider to offer a UK-centric fund option – which comes with additional incentives, such as increased pension tax relief on contributions. This will encourage people to support domestic companies while still providing choices, empowering investors, not cornering them.

If the Chancellor really wants to make the UK more attractive to investors – both institutional and retail – he should start with the simplest of reforms and remove stamp duty on purchases of UK shares.

If the Chancellor really wants to make the UK more attractive to investors – both institutional and retail investors – he should start with the simplest of reforms and remove stamp duty on purchases of UK shares. This outdated tax adds friction to every transaction and makes UK equities less competitive compared to the rest of the world. Removing the regulations would send a clear message that the UK wants to reward investment in its own companies, not sanction them.

The UK must work to make its markets so dynamic and rewarding that capital chooses to stay here. Forcing pension money into domestic shares may produce a sugar spike in the short term, but it will not solve the underlying problem. We must focus on policies that make investment in the UK an opportunity, not an obligation – this is the only way to rebuild the UK stock market and create the retail investment culture the Chancellor desires.

Michael Healy is UK Managing Director, IG