A pensions manifesto for the new prime minister

In this article, former pensions minister Ros Altmann sets out the pension reforms she believes could help the new prime minister boost growth, strengthen British businesses and improve local services – without costing taxpayers a penny...

It is time for revolution, not evolution, using pension funds to rebuild Britain.

Bold pension reforms can ensure more money is invested in Britain and improve local services, rather than helping overseas growth at the expense of our own.

A pension manifesto for growth

I believe the new prime minister should do three key things:

1. Require at least 25% of pension contributions to be invested in UK growth assets
2. Councils with huge pension fund surpluses should take contribution holidays and use the money to improve local services
3. Encourage defined benefit (DB) schemes to run on and invest in growth assets like equities again, rather than buying annuities 

Investing in UK growth assets

Requiring at least 25% of pension contributions to be invested in UK growth assets would not cost the government additional money. By ensuring pension funds invest more in listed smaller, medium and large businesses, as well as scale-ups, private assets, infrastructure and housing, the government could boost growth without spending more public money.

Over £70bn a year is added to people's pensions in tax and National Insurance reliefs so there is a clear justification for requiring at least 25% of all future pension contributions to be invested in British growth assets. A quarter of pension funds can be taken tax-free and no National Insurance is paid on pension income, so expecting UK pension investors to boost growth as a quid pro quo for the large taxpayer sums they receive, seems perfectly reasonable. If they want to invest more than three quarters overseas, they should not get taxpayer subsidies.

This is incentivisation, not mandation – requiring at least 25% of pension contributions to be invested in Britain does not force funds to buy domestic assets. Pension fund managers or trustees are free to invest 100% overseas, but they will not receive taxpayer help to do so.

Pension fund managers do not seem to recognise the scale of taxpayer contributions they benefit from each year, which is more than the country's defence and policing budgets put together. The new prime minister should put this to better use.

Britain's productivity and technology funding have fallen behind as pension funds have pulled out of UK equities. Pension funds used to provide a reliable underpin for British equity markets, investing the ongoing pension contributions. But over the past 20 years, they were encouraged to reduce UK weightings, selling domestic shares in order to derisk and reduce costs.

Such large-scale selling depressed share prices, caused market underperformance and weakened the corporate sector. Radical reforms can harness pension funds to revive domestic investment.

Weaker equity markets have increased the cost of capital: Reviving pension fund inflows to UK growth assets would help rebuild confidence in UK assets and increase the availability of funding for start-ups and scale-ups which has diminished. This can achieve the urgent requirement to improve institutional support for growing businesses, without relying on foreign investors or additional government expenditure. This would drive down the cost of funding – with a consequential improvement in growth – as companies raise money more cheaply via equity than debt.

Other countries' pension funds overweight their domestic markets, so why should we be the outliers who show no confidence in our own economy? We are the only major country whose pension funds fail to overweight their own markets, making us a global outlier. Trying to reverse this trend is not protectionism, it is just ensuring taxpayer money is spent more wisely and bringing back domestic long-term investment to help the economy.

Council contribution holidays

The second thing I think the new prime minister should do is to ensure local authorities take pension contribution holidays to help revive local growth.

Council pension funds are in huge surplus – in other words, they have far more money than they need to pay all the future pensions. But they are still paying over 20% of council tax receipts into these funds each year.

The Local Government Pension Scheme (LGPS) for England and Wales had a funding level of nearly 150% in March 2025 and has improved further since then. Record scheme surpluses mean council pension funds have about £150bn more money than they are expected to need, even on a low-risk basis.

Sources corroborate that nearly £1 in every £4 of council tax is spent on pensions contributions. Pausing these pension contributions for the moment, can help fill the funding gaps that nearly all councils are facing and help fund urgent local needs, including social care, libraries, pothole repairs or bin collections. This could also save central government from having to bail out councils which have declared bankruptcy.

Encourage DB schemes to run on

More private sector DB schemes have large surpluses and could run on, rather than buy annuities, which would help boost growth.

Pension surpluses have helped more trustees and employers to run their schemes on and continue investing, rather than just buying annuities to get rid of all risk. Reducing risk also means lowering expected returns, while buying annuities deprives the economy of potential investment flows into long-term growth assets.

The government has made some moves in this direction, but we could go much further.

DB scheme annuity purchases have driven gilt yields higher, constraining fiscal spending. I am very concerned about the level of annuity purchases by DB schemes, which are being moved offshore, reducing the security of the annuity promise. In addition, scheme buy-ins and buyouts may have a negative effect on the gilt market, adding to government funding costs.

Advisers and insurers encourage pension funds considering buying annuities, to sell risk assets and invest more in gilts. But as soon as the insurer takes in the assets, it sells the gilts and buys higher-yielding, higher-risk bonds.

In my view, this selling pressure is part of the reason, along with Bank of England quantitative tightening gilt sales, that UK long yields have risen further than other countries.  Higher gilt yields have worsened the UK fiscal position directly by increasing the cost of government borrowing and indirectly by raising borrowing costs across the economy while also restricting government spending.

The increasing menu of DB endgame options can help reduce annuity buying and increase investment in growth assets.

Recent regulatory and legislative changes will enable more DB schemes to run on. With over £1trn in private sector DB schemes (even after hundreds of billions have already been used to buy annuities in recent years) there is a clear opportunity for using sponsor replacement, superfunds or surplus sharing to increase investment into UK equities and other growth assets.

Estimates suggest private sector DB schemes may buy around £50bn of bulk annuities in 2026, but this money could be better spent investing in risk assets.

Conclusion

Pension funds could be a silver bullet to revive UK growth.

Using taxpayer reliefs more wisely, encouraging council contribution holidays and more productive use of DB assets could be a new dawn for the country, setting up a virtuous circle to replace the doom loops of market underperformance, lower ratings and more good companies leaving the UK.

I hope the new prime minister will seize this opportunity of harnessing pension assets to boost British growth.

Baroness Ros Altmann is a pensions campaigner and a former pensions minister

See also:

What Andy Burnham as prime minister could mean for pensions