Call for higher allocation to UK equities in default pension funds

A capital markets think tank is calling for default pension funds to invest 20-25% of their equity holdings in UK companies – a weighted allocation to reverse the decline of London’s stock market. It claims two-thirds of savers believe UK pensions should invest more in domestic equities, even if returns are “marginally lower”.

New Financial, the think tank, published its findings in partnership with the Capital Markets Industry Taskforce, which is chaired by CEO of the London Stock Exchange, Julia Hoggett. She claims the UK has underinvested in itself for the past 25 years, “from infrastructure and private companies, through to the companies listed on its public markets”.

“The need to stimulate growth is profound and therefore the importance of pulling the levers required to reverse this underinvestment is equally urgent,” she added.

MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

Despite performing well so far in 2025, UK equities are still persistently undervalued, with companies shunning London as a listing venue in favour of regions where they can secure a higher valuation, such as the US. Private equity firms and foreign buyers have also swooped in to snap up UK companies at a discount.

Last year, 88 companies either delisted or transferred their primary listing away from the London Stock Exchange, according to professional services firm EY – the most since 2009. Notable departures included Just Eat, Paddy Power’s parent company Flutter Entertainment, and equipment rental company Ashtead.

A lack of pension investment is part of the problem. New Financial says defined contribution (DC) pension schemes allocate just 4.9% of total assets to UK equities, on average. The global average for domestic equities is 13%.

The government is trying to tackle the issue through policies like the Mansion House Accord, which has seen 17 workplace pension providers voluntarily committing to invest at least 5% of assets in the UK by 2030. New Financial’s recommendations go a step further, calling for allocation of 20-25% within default funds. While savers would be able to opt out of their default fund, most stick with this automatic option.

“Vibrant public equity markets are crucial for the health of the UK economy, and a strong domestic base of pension funds really matters for UK equity markets,” said William Wright, the think tank’s founder. “Of all the options for reform that have been proposed in this debate – from doing nothing to mandation – we think the UK-weighted default fund strikes the best balance.”

What would it mean for pension savers?

The UK-weighted default fund could have a “game-changing impact” on UK equities, according to the report, increasing overall investment by around £76 billion (+230%) by 2030. But what would it mean for pension savers?

While UK equities have had a strong year so far in 2025, they have lagged their US and global peers in recent decades. UK equity funds underperformed US equity funds in 17 of the past 20 calendar years, according to LSEG data. They underperformed global funds in 12 out of 20 years.

While savers could opt out of their default fund if they didn’t want such high exposure to UK equities, the reality is that pension engagement in the UK is low. Six in 10 are not even aware their pension savings are invested, according to Hargreaves Lansdown. Nest, one of the UK’s biggest workplace pension providers serving almost 14 million members, says 99% of its members are in a default fund.

“We know that most of our members stay in the first fund they’re invested in, so we need to make sure our default fund is the right choice and does the hard work of investing on their behalf,” Nest’s chief investment officer Liz Fernando recently told MoneyWeek.

When the government announced new targets under the Mansion House Accord earlier this year, the response from industry experts was mixed. Commitments from pension schemes were voluntary, but the government has said it will take a reserve power in the Pension Schemes Bill, which would allow it to set “binding asset allocation targets”.

“This is where I have some reservations,” said Jason Hollands, managing director at wealth management firm Evelyn Partners. “Pension schemes have a fiduciary duty to deliver good returns for savers and so for any government to forcibly influence asset allocation decisions carries risk.”

The UK stock market could do with some attention, but pension savers might question whether it is their responsibility to save it – particularly when many already face significant retirement shortfalls. An alternative approach is to offer incentives.

Hollands said: “The carrot [rather than the stick] approach would be to make the UK an attractive destination for businesses and investors (both domestic and international) by having a competitive tax environment, removing prohibitive red tape, welcoming entrepreneurs from around the globe, and measures like scrapping stamp duty on share purchases.”

The government hopes its Leeds Reforms will achieve some of these ambitions.