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The letter to the chancellor – co-ordinated by the London Stock Exchange Group and signed by the chief executives or chairs of FTSE – said the availability of domestic risk capital was the “vital fuel that businesses, both public and private, need to grow”.
It said businesses were “increasingly concerned” by the sharp decline in domestic risk capital being invested in companies in the UK by pension funds in particular.
In the letter, the businesses noted that, in 1997, UK pension funds invested 53% of their allocation to equities in companies listed in the UK but said that, by 2025, this had fallen to just 4.1%.
It said this was “equivalent to withdrawing £25bn of investment from these companies every year”.
The letter noted DC pension fund allocations to UK equities were “significantly lower” than the global average for DC pensions of over 13% of assets in domestic equities, and nearly 30% of total equities invested in domestic equities.
It stated: “Without intervention, this will drop further, with projections showing only 3.5% of DC pension assets being allocated to companies in the UK by 2030. While this is a stark example of underinvestment in our public markets and the UK companies in those markets, the scarcity of domestic investment goes beyond public markets.”
The letter said the underinvestment had “real consequences for UK growth” – adding that, while initiatives such as Sterling 20 and the Mansion House Accord were “steps forward”, more is needed to translate them into actual investment flows.
It said: “We urge you to be bold. Condition the privileges that are granted to UK DC pension scheme default funds upon them allocating a minimum 25% of their default fund assets to UK investments – across each asset class. This is not mandation as individuals could choose to opt out of the default fund without losing any of their pension entitlements.”
The letters said this could be done by introducing a requirement for all DC pension schemes to designate a “UK-weighted” fund as their default arrangement.
It said any individuals preferring not to have their pension invested in the UK-weighted fund could opt for a different allocation strategy, but the default starting point for DC pension schemes “must be one that is consistent with both driving savers’ returns and supporting a resilient domestic economy”.
The letter said the recommendations could be “practical to implement” through what it said would be minor amendments to the Pensions Bill 2025, the Investment Regulations 2005 and Financial Conduct Authority’s Conduct of Business Sourcebook (COBS).
It said implementation of these recommendations would set the default level of UK domestic pension investment closer to that of international competitors – increasing overall investment in UK equities by DC schemes by around £76bn in today’s money.
The letter concluded: “This proposal would not require additional government expenditure and would result in material investment in the UK, directly supporting economic growth and allowing British savers to share in the nation’s success.
“Now is the time to back ourselves, ensuring British companies have the capital they need and that British savers benefit from the growth they help create. We urge you to act decisively, securing prosperity for generations to come.”
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