UK Economic Secretary to the Treasury, Bim Afolami, has said UK pension funds do not invest “enough” in unlisted equity in the UK, highlighting this as one of the three “major” challenges facing the UK economy.

Speaking at a Bright Blue conference on the future of UK finance, Afolami stressed that this wasn’t just his or the Chancellor’s judgement, but was clear when comparing British pension funds to international peers in Canada and Australia.

“In places like Canada or indeed Australia, better returns for pension savers are being generated with effective investment strategies and more investment in high-quality domestic growth stocks for defined contribution (DC) schemes,” he said.

“Comparable Australian schemes invest 10 times more in private markets as a proportion of their total assets than equivalent UK pension funds.”

In comparison, he noted that UK pension fund holdings in UK-listed equities have fallen. “In 1997 they were 53 per cent, now it is 6 per cent," he said.

However, Afolami noted that there is work underway in this space, as the government recently announced plans to require DC pension schemes to publicly disclose their level of investment in UK businesses, as well as their costs and net investment returns by 2027.

Afolami reiterated these plans in his speech, adding that “if there’s no improvement, as the Chancellor said in the Spring Budget, we will then consider what further action should be taken if we are not on a positive trajectory towards international best practice.”

He also argued that the push for higher investment levels in these asset classes "isn’t about the City of London or companies", but about people, arguing that, if the UK has higher investment levels, it will help improve returns for savers and promote economic growth.

“By unlocking billions for investment for high-growth companies and by doing so, it will also help our capital markets to thrive,” he added.

However, Afolami reassured audience members that the government is not looking to take a mandatory approach, stating: “I am not talking about forcing anyone to do anything. What we are saying is transparency will be quite an important lever. We’re not talking about mandating or forcing anyone to do anything.

“But I also think it’s important to recognise that an integral part of the capital market is capital.

“You have got to have enough of it so if you end up with a world where capital outflows are significant, it is really hard for businesses to raise, what they need to raise but we are not going to mandate anybody to do anything.”

He acknowledged that there are challenges, however, identifying the fragmented nature of the pensions market as a "fundamental issue".

Given this, he emphasised that the government is taking steps to improve consolidation of the pension market, particularly the Local Government Pension Scheme, as well as ensure that the regulatory structure “rewards” funds that invest for long-term return and see long-term value, rather than “always” considering the cost.

"In addition we are developing vehicles that ensure that pension funds have access to high growth assets including in the science and tech sectors via the Long-term Investment for Technology and Science (LIFTS) initiative, which we announced the winners of at the Spring Budget," he added.

“To this end, the package the Chancellor announced last year at Mansion House, including the Mansion House Compact, will unlock up to £75bn of financing for growth by 2030,” he concluded.

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