From Barriers to Backstops: Unlocking UK Pension Investment

Pensions UK recently published a report which highlights untapped capacity for UK pension funds, including for Direct Benefit (‘DB’) Schemes and Local Government Pension Schemes, to invest in British businesses but also argues that systemic issues create unnecessary complexity and inhibit the ability to scale to the levels seen internationally. This report is interesting because it argues the issue is not a lack of willingness to invest domestically, but rather a lack of clear investment routes, suitable products, policy stability and effective coordination across government and public bodies. 

We’ve considered the points put forward against the backdrop of the Mansion House Accord (under which major pension providers have committed at least 10% of their Direct Contribution (‘DC’) funds to private markets) and, the recent debates and eventual law being passed by Parliament around the concept of mandation as a backstop for domestic investment for DC Schemes (which we had previously considered in our article Pension funds and the drive for greater domestic investments – the international perspective). 

Overcoming Barriers to Investment

Pensions UK outlines multiple proposals for overcoming the main barriers to UK pension investment, which they argue requires coordination across three key areas: government, regulators and public finance institutions. Key themes of the proposals are: 

1. Policy and Regulatory Alignment

• Joined up government strategy
• Reducing structural and regulatory barriers
• Removing unintentional restrictions seen in the DB funding regime

2. Shift from Cost to Long-Term Value

• Moving from short-term cost minimisation towards long-term net returns for members.

3. Investable Opportunities

• Unlocking private markets investment along with new investment vehicles
• New investment structures, better regulatory support and improved access and scalability
• A clear pathway from the policy intent to accessible, well-structured investment vehicles

4. Coordination, Capability and Confidence Building

• Providing due diligence support and collaboration to increase confidence
• Public-private partnerships 

Examples of specific solutions

Pensions UK also put forward examples of specific solutions to address these barriers, such as:

• Increased Trustee education and understanding

Improving trustee confidence and knowledge with a wider array of investment options considered, they argue, will lead to stronger member outcomes from improved diversification, enhanced long term returns, and a greater alignment between investments and scheme objectives. 

• Appropriate TPR regulation

The report notes the Pensions Regulator can disincentivise investment in certain asset classes and calls on them to ‘take a flexible and pragmatic approach to regulation that works for open and closed DB schemes’ to allow for consistently stronger outcomes. In particular, they argue that open DB schemes may benefit from ‘regulation that gives them more space to consider different kinds of asset classes’. 

• Move away from fee sensitivity typically driven by Employee Benefit Consultants (“EBCs”)

EBCs help advise companies, amongst numerous other sectors, on pensions compliance. Given the scale at which most EBCs operate, they can exacerbate fee sensitivity regarding fund choice and further shift focus from long-term value to short-term cost minimisation. This fee sensitivity can overshadow long-term growth for members when evaluating fund options. Pensions UK note the Value for Money framework from the Pensions Schemes Act 2026 has the potential to help shift the focus to long-term value for members, but propose multiple further changes such as FCA regulation surrounding consultant advice on the selection of master trusts. 

• Re-Working Charge Caps on Contract-Based Pension Funds

Charge caps limit the rates which default funds in DC schemes can charge to 0.75%. The report notes that typical venture capital or private equity fee structures have an annual management fee of around 2%, in addition to performance fees of around 20% on profits. Even if funds can improve their long-term net returns by opting for private markets, they are limited by the fee cap. Pensions UK advocate for a ‘charge cap calculation structure that excludes performance fees’ similar to that seen with trust-based pensions (albeit certain performance-based fees are already excluded from the 0.75% cap).

What could this mean for Pensions going forward? 

In light of this report, and its various arguments, we’ve considered what this could mean if their proposals are implemented and the barriers they’ve identified were removed. We consider this could mean:

Increased willingness to invest in private markets

This change would likely make these types of investments more realistic and defensible for trustees in their long-term investment strategies. As a result, trustees’ risk tolerance and willingness to invest in private markets would likely increase over time and therefore reshape the standards of what reasonable care and skill looks like for trustee decision-making. 

A shift from short term cost minimisation to long-term member outcomes

Instead of always focusing on low fees, this shift would encourage pension schemes to do further analysis to assess potential long-term net returns. As a result, active governance for strong member outcomes will become more important, potentially increasing the burden on trustees with scrutiny as to whether their fiduciary duties have been properly discharged. 

Further Consolidation

Due to the consolidation of pension schemes over the past decade, the number of large pension schemes has increased. We consider therefore that if private markets were to be more readily accessed for investment, larger schemes would be in a stronger position to do this and would be better able to afford greater expertise. In contrast, smaller schemes may struggle, or be less willing, to do the same, particularly due to a lack of comparative resources and scale. As a result, this may place greater pressure on smaller schemes to consolidate in order to realise better outcomes for members.

You can read more about small scheme consolidation here.

Greater Trustee and Scheme Confidence

Increased collaboration and education would likely lead to better and more informed decision-making. As a result, trustee fiduciary standards may increase. 

Better designed long-term investments could support stronger retirement outcomes and wider economic benefits, but only where the risks, costs and governance are handled sensibly.

Less need for the reserve backstop power 

Recent changes enacted in the Pensions Schemes Act 2026 establish a backstop power enabling the government to direct investment of up to 10% of a fund into “qualifying assets” (with up to 5% being in UK-based assets) for DC master trusts and group personal pension schemes. You can read more about the recent changes in the Pensions Schemes Act 2026 here.

If the proposals put forward by Pensions UK were to be implemented and succeed, the need for the UK government’s backstop power would arguably be greatly reduced as trustees would feel more confident to invest funds in a more diverse range of assets. 

Additional Disclosure

There are additional disclosure requirements when investing in illiquids: there needs to be disclosure of illiquids in the investment policy in the scheme’s SIP, and also trustees are required to explain the percentage of assets in default funds allocated to different asset classes in the chair’s statement.

Potential shift in regulatory expectations 

Standards and expectations of trustees may move from whether trustees can invest in these diverse assets to whether they have given them proper consideration. There will be differing regulatory expectations to ensure that the correct balance is made and trustees will need to ensure they are informed to remain compliant with their obligations. 

We will continue to monitor any potential developments with interest.

Written by Lauren Young and Christian Wade.