Why Reeves' pension funds plan won't work

Chancellor of the Exchequer Rachel Reeves speaks during the Semafor World Economy Summit 2025

(Image credit: Kayla Bartkowski/Getty Images)

published 25 April 2025

There will be targets, quotas and guidelines. Chancellor Rachel Reeves is planning to hustle the UK’s largest pension funds into investing more money in unquoted UK assets, with a new voluntary code expected to be unveiled over the next few weeks that could unlock tens of billions of pounds in extra cash for British industry.

The final version of the code – called the Mansion House Compact – will be revealed over the summer. It’s likely to stop short of setting any compulsory quotas for pension funds to invest a set percentage of their assets in the UK, an idea Reeves toyed with while she was in opposition.

However, it is expected to include a voluntary commitment to invest 10% in unlisted assets such as infrastructure projects and start-ups, amounting to around £100 billion of fresh money. Roughly half of that is supposed to be invested specifically in the UK.

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Step-change for UK pension funds investing

If this happens, it will be a step-change in the way that UK pension funds invest their money, steering it away from global bonds and traditional mega-cap equities into far less conventional assets. And it’s easy to argue it will be better for both sides.

The pension funds will make far better returns than they would from the more traditional investments that have dominated their typical portfolios for the past 50 years. The bond market, after all, is still generating historically low returns and, with Wall Street looking far less attractive under Donald Trump’s volatile tariff regime, mainstream equities are not looking much better, either. At the same time, putting more money to work in private assets should boost economic growth. It will help fund badly needed improvements to the UK’s infrastructure and put cash into the start-ups and venture-capital funds that are far more likely to kick-start growth.

The problem is that the government is, at the same time, also making the UK a far worse place to invest or start a business. In her first Budget, Reeves raided the corporate sector for an extra £24 billion by putting up national insurance paid by employers, a levy that has made it far more expensive to employ people. At the same time, the living wage has been pushed up well ahead of the rate of inflation, and the government is pushing ahead with a major overhaul of employment law to give workers more rights. The UK used to have one of the most flexible labour markets in the developed world, making it relatively risk-free for companies to expand their payroll as they grew. That is now in the past.

We also have some of the most expensive industrial energy prices in the world and the government has imposed an endless series of extra charges on companies to combat climate change, such as a packaging levy, for example, or the extra tax that will have to be paid on business class flights.

Wealthy foreigners have been driven out of the country by changes to the non-dom rule that exempted them from tax on earnings outside the UK, even though many of them were building businesses in this country. Windfall taxes have been imposed on energy companies and banks, and are constantly threatened on any industry that happens to prove successful. The capital gains tax on entrepreneurs has been raised and the business rates relief that was keeping many bars and restaurants afloat has been scaled back. The UK has been turned into a tough place to do business.

The wrong way around

The government is getting this the wrong way around.

Investment in the UK won’t be increased by publishing yet more codes, imposing another set of targets, or bullying pension funds into placing money into a favoured strategy.

It will be increased by making the UK a more attractive place to invest. The government could offer a lower rate of corporation tax for start-ups, or loosen the planning rules for major infrastructure projects, or simply restore the flexibility of the labour market.

The money will flow to the countries where the best returns can be made. Unfortunately, that is not true of the UK right now – and until it is, forcing the pension funds to invest more of their cash in Britain means they will just make lower returns.

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Matthew Lynn is a columnist for Bloomberg, and writes weekly commentary syndicated in papers such as the Daily Telegraph, Die Welt, the Sydney Morning Herald, the South China Morning Post and the Miami Herald. He is also an associate editor of Spectator Business, and a regular contributor to The Spectator. Before that, he worked for the business section of the Sunday Times for ten years.

He has written books on finance and financial topics, including Bust: Greece, The Euro and The Sovereign Debt Crisis and The Long Depression: The Slump of 2008 to 2031. Matthew is also the author of the Death Force series of military thrillers and the founder of Lume Books, an independent publisher.