UK government wants to make pension pots bigger with riskier investments – but it faces big challenges

• The pension market in the UK has expanded to become the largest in Europe, worth over £2.5 trillion in 2021.
• Successive British governments have encouraged this growth, especially through the auto-enrolment scheme which made workplace pension contributions compulsory.
• But they haven’t yet managed to channel those funds in ways that really boost the economy and make people better off.
• Hunt now wants to push them to raise their returns by making more investments considered higher risk – especially in small firms developing new technologies.

The gamble has already begun

• Some pension funds responded by borrowing, using their bond holdings as collateral, and investing the extra funds in a wider range of assets to raise their overall returns.
• The strategy worked well while banks were keeping interest rates low and pushing bond prices up through programmes of quantitative easing.
• But when bond prices fell unexpectedly, it left funds confronting sudden losses, and scrambling for cash.
• Those rate rises have also significantly reduced household wealth, curbing consumer spending and further reducing the incentive for business investment.