Conclusion: A Radical Reimagining of UK Pension Investment

In our previous post, we examined the current asset allocation state, proposal for mandatory investment, cases both for and against, and the current academic research on this subject.

In this final post of this series, we make the case for a radical reimagining of the current state, and lay out a 5 year implementation plan.

Conclusion: A Radical Reimagining of UK Pension Investment

After examining the evidence and arguments on both sides, we believe the optimal approach requires not incremental, nor reductionist legislative change, but fundamental structural reform that addresses the six root causes identified in our last post . The current system's failures demand innovative solutions that fundamentally restructure how pension funds relate to the domestic economy.

Eight Transformative Recommendations

1. The Fiduciary Duty Revolution Act

Parliament should pass comprehensive legislation fundamentally redefining fiduciary duty to include explicit consideration of systemic economic factors affecting long-term pension sustainability. This goes beyond current proposals to create a new legal framework where trustees have both the right and obligation to consider how their investment decisions affect the broader economic environment. The legislation should establish:

• Systemic Risk Consideration: Trustees must evaluate how extreme under-allocation to domestic markets affects long-term economic growth and employment prospects for their members

• Intergenerational Justice: Explicit consideration of how current investment decisions affect future generations of scheme members

• Economic Stewardship: Recognition that pension funds have a responsibility to support the economic ecosystem that provides their members' livelihoods

• Legal Safe Harbour: Protection for trustees making domestic investments based on reasonable long-term economic analysis

2. The British Pension Investment Authority (BPIA)

Create a new statutory body combining investment management, regulatory oversight, and economic policy coordination. Unlike existing proposals for voluntary aggregation, BPIA would have mandatory jurisdiction over all pension schemes below £1 billion in assets, with opt-in available for larger schemes.

BPIA would operate with:

• Sovereign Wealth Fund Model: Professional investment management with clear performance benchmarks and political independence

• Scale Economics: Ability to access investment opportunities unavailable to individual schemes

• Regulatory Integration: Streamlined oversight reducing compliance costs and regulatory barriers

• Economic Policy Coordination: Direct liaison with government on economic development priorities

3. The Pension Fund Governance Revolution

Fundamentally restructure pension fund governance to address the consultant oligopoly and trustee capability deficits. We would like to see the introduction of the following :

• Mandatory Professional Trustee Requirements: All schemes above £100 million must have at least one professional trustee with relevant investment qualifications Investment Consultant Regulation: Introduce licensing, performance disclosure, and conflict of interest regulations for investment consultants Trustee Investment

• Education: Mandatory continuing education requirements focusing on domestic investment opportunities.

• Performance Transparency: Public disclosure of consultant performance and fee structures

4. The Asymmetric Regulatory Framework

Completely reverse current regulatory incentives by implementing a 2-tier differentiated regulatory treatment based on domestic allocation:

Enhanced Scrutiny Track: Schemes with less than 10% UK allocation face:

• Enhanced reporting requirements explaining the rationale for low domestic allocation

• Mandatory stress testing of currency risk exposure

• Additional governance requirements for international investment decisions

• Higher regulatory fees to fund domestic investment promotion

Streamlined Track: Schemes with 10%+ UK allocation receive:

• Reduced reporting requirements and faster regulatory approval processes

• Access to government-backed investment opportunities

• Regulatory safe harbour for domestic investment decisions

• Preferred status for government pension-related contracts

5. The UK Investment Opportunities Exchange

Create a government-backed digital platform connecting pension funds with domestic investment opportunities. Options might include:

• AI-Powered Deal Matching: Machine learning algorithms matching pension fund requirements with suitable UK investment opportunities.

• Standardized Due Diligence: Government-certified due diligence processes reducing investigation costs and risks.

• Risk Sharing Mechanisms: Government co-investment and guarantee schemes for qualifying domestic investments.

• Performance Monitoring: Real-time performance tracking and risk management for all platform investments

6. The Corporate Governance Transformation

Implement radical corporate governance reforms designed to align company management with long-term pension fund interests. For example:

• Mandatory Pension Representation: FTSE 350 companies must reserve board seats for pension fund representatives.

• Long-Term Incentive Alignment: Executive compensation must be tied to long-term value creation metrics aligned with pension fund investment horizons.

• Stakeholder Governance: Companies must explicitly consider pension fund member interests in strategic decision-making.

• Investment Covenant: Listed companies must commit to maintaining UK-based operations and investment.

  
  

7. The Pension Tax Revolution

Fundamentally restructure pension tax reliefs to incentivise domestic investment. Whilst not an exhaustive list, we believe that these options are amongst the most achievable options:

• Graduated Tax Relief: Tax relief rates vary based on domestic allocation percentages

  • 0-5% UK allocation: Standard tax relief

  • 5-15% UK allocation: 25% enhanced tax relief

  • 15%+ UK allocation: 50% enhanced tax relief

• Domestic Investment ISAs: Create special tax-advantaged accounts for pension fund domestic investments.

• Capital Gains Exemption: Eliminate capital gains tax on domestic investments held for more than 10 years.

• Inheritance Tax Breaks: Preferential inheritance tax treatment for domestic pension investments

8. The Economic Integration Protocol

Create formal mechanisms integrating pension fund investment strategies with national economic policy. Options might include:

• National Investment Council: Joint government-pension fund body setting strategic investment priorities.

• Economic Development Partnerships: Formal partnerships between pension funds and regional development agencies.

• Infrastructure Investment Mandates: Specific requirements for pension fund participation in national infrastructure projects.

• Economic Security Assessment: Regular evaluation of pension fund contribution to national economic resilience.

Implementation Strategy: The Five-Year Implementation

We understand that structural change of this magnitude is complex, often slow, and highly politicised. In outline, however, we believe that a programmatic approach such as the one below would guide both direction and measurable progress.

Year 1: Foundation

• Pass Fiduciary Duty Revolution Act

• Establish BPIA with initial £10 billion government capitalization

• Launch UK Investment Opportunities Exchange

• Begin corporate governance consultation
  

Year 2: Regulatory Restructuring

• Implement Asymmetric Regulatory Framework

• Introduce investment consultant licensing

• Begin mandatory professional trustee requirements

• Launch graduated tax relief system
  

Year 3: Governance Transformation

• Implement corporate governance reforms

• Establish National Investment Council

• Begin mandatory pension board representation

• Launch Economic Integration Protocol
  

Year 4: Performance Optimization

• Evaluate and adjust all reform measures

• Expand successful programs

• Address implementation challenges

• Prepare for full system integration
  

Year 5: System Integration

• Complete transformation to new system

• Establish permanent monitoring and adjustment mechanisms

• Evaluate economic and pension outcomes

• Plan for continuous improvement

Success Metrics and Accountability

Success should be measured across multiple dimensions.

• Financial Performance: Risk-adjusted returns, fee reduction, and member outcome improvement.

• Economic Impact: GDP growth, productivity enhancement, and employment creation.

• Market Development: UK market liquidity, IPO activity, and international competitiveness.

• System Resilience: Reduced systemic risk, improved governance, and enhanced sustainability.

  
  

The Radical Imperative

The current UK pension allocation problem cannot be solved through incremental reform or voluntary initiatives. The six root causes identified require systematic structural change that addresses fundamental incentive misalignments and capability deficits.

The stakes are existential. With pension assets representing over £2.8 trillion in the UK, the current system's failure to support domestic economic growth creates a negative feedback loop that undermines the very economic foundation upon which pension sustainability depends.

International competitors are already implementing more sophisticated pension-economy integration models. Canada's public pension plans have become global leaders in infrastructure and private equity investment. Australia's superannuation system effectively channels domestic savings into economic development. The Netherlands' pension funds have maintained strong domestic allocation while achieving superior returns.

The UK cannot afford to continue with a fragmented, consultant-driven, domestically-disconnected pension system while other countries develop more sophisticated models. The eight recommendations above represent a comprehensive reform agenda that addresses systemic causes rather than just the symptoms.

For pension investors, these reforms offer the prospect of improved risk-adjusted returns through better alignment of investment strategies with long-term economic fundamentals. For pension trustees, they provide clearer legal frameworks and better governance structures. For the City of London, they offer the possibility of revitalising domestic capital markets and strengthening the UK's position as a global financial centre.

The time for incremental change has long passed. Having painted ourselves into a corner, the UK pension system needs fundamental transformation to serve both pensioners and the broader economy effectively. The question is not whether such radical change is necessary, but whether the political will exists to implement it.

Recursive - a Fractyl Consulting Analysis. 

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This represents the views and opinions of Fractyl Consulting and is based on our professional experience, research and available commentary. It is intended to stimulate discussion and constructive debate on important matters facing society, industry and government.

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1. HM Treasury, "Pensions Investment Review: Final Report," May 30, 2025

2. HM Treasury, "Pension schemes back British growth," May 13, 2025

3. HM Treasury, "Pension fund investment and the UK economy," November 27, 2024

4. Ibid.

5. HM Treasury, "Mansion House Accord," May 13, 2025

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