The debate over how UK pension capital should be deployed is becoming a key issue for Labour in its pursuit of economic growth.

Direct impact: Legal & General is among the pension companies that have invested directly in property, but many argue that indirect investment routes may be more effective

In May 2025, the government brokered the Mansion House Accord, a voluntary agreement between 17 major UK pension providers to allocate 10% of default defined-contribution (DC) funds to private markets by 2030.

The idea is to get UK pension money invested in ‘productive assets’ such as property and infrastructure, rather than buying financial assets. Policymakers say this will direct longer-term capital into productive sectors of the economy that support growth and jobs.
REITs and investment trusts are currently excluded from the vehicles that pension funds can use to meet government investment targets. But earlier this month, an amendment to the Pension Schemes Bill was put forward in the House of Lords to add these companies to the list of vehicles suitable for pensions investment.

There is much debate over whether pension fund money, which is invested for the medium to long term, should be channelled into listed companies or unlisted funds, such as the open-ended long-term asset fund (LTAF). This new fund type allows a broader range of investors to invest in long-term assets such as property that cannot be sold quickly.

Major industry bodies, including the British Property Federation (BPF) and the Association of Real Estate Funds (AREF), have backed the Pension Schemes Bill’s current drafting.

However, the Association of Investment Companies (AIC) opposes the bill as currently drafted. AIC chief executive Richard Stone says: “We’re trying to persuade the government to amend the legislation so that it doesn’t effectively exclude listed companies as a route to investing in private assets. This isn’t just about property. It’s about investment in illiquid private assets more broadly.”

The policy framework behind the bill seems straightforward. Under the Mansion House Accord, the big pension providers have committed to invest at least 5% of their funds in UK-based private assets, such as property. To give these voluntary targets teeth, the Pension Schemes Bill includes a legislative backstop; if pension schemes fail to fulfil their allocations under the accord, the bill gives ministers the power to mandate them to do so by law.

“That is controversial,” Stone says. “Pension trustees have a fiduciary duty to deliver the best returns for beneficiaries. If the state starts directing where money must be invested, that creates tension with trustees’ responsibilities.”

Stone believes the legislation should focus on what assets the government wants to support, including property, rather than prescribing how pension schemes should access them. Excluding listed companies, he says, creates an unnecessary distortion in the market and limits trustees’ choice.

Under the bill’s current drafting, pension schemes that have signed up to the accord would have two choices to fulfil their allocations: invest directly in assets or use qualifying unlisted vehicles such as LTAFs.

‘Anti-competitive’ exclusion

Life peer Ros Altmann, a pensions expert and campaigner for pension reform and savings, describes the exclusion of listed companies as “anti-competitive”, arguing that it favours LTAFs and large unlisted fund managers at the expense of company structures with long track records of investing in illiquid assets.

“Many master trusts do not yet have expertise to invest directly and the risks of doing that are much higher than using a ready-made portfolio that is put together by experts who have been managing these kinds of assets for years,” she says.

She adds that open-ended fund investment has “clear risks” for long-term illiquid assets, especially property. “If the fund suffers redemptions, it may be forced to either sell assets in a distressed sale to meet deadlines
for repayments or gate the fund.”

By contrast, if an investor in a fully invested REIT or closed-ended fund wants liquidity, they just sell their shares in the market.

The strength of the UK’s financial markets will be negatively impacted
Ros Altmann, peer and pensions expert

However, some argue that investing in a REIT doesn’t necessarily represent ‘new capital’ going into the asset class, because shares may simply be bought from another investor. The only exception would be if a company like British Land held a rights issue or an initial public offering (IPO) to raise new capital specifically to deploy into assets.

It can also be argued that investing in REITs and investment trusts is still just about buying and selling financial assets, while doing nothing to put money into the UK economy.

However, this argument is “misconceived”, according to Altmann. She adds: “The more demand there is for any asset, the more the company can expand or raise extra finance more cheaply. Extra investors wanting to buy into investment trusts and REITs will provide more firepower for portfolio managers to invest in additional property or productive assets.”

She also warns of a series of negative results if the government blocks REITs and investment trusts from being beneficiaries of the reforms. One consequence, she says, is that REITs and investment trusts may suffer redemptions as pension funds that already hold them will feel they have to divest and won’t try to invest more.

“The strength of the UK’s financial markets will also be negatively impacted – this sector is around one third of the FTSE,” Altmann adds.

She believes another potential impact of excluding REITS from pension fund investment will be that pension scheme members will lose the chance to invest in a range of portfolios being sold at discounts to their true value.

“It is possible more predators will try to snap up some of these trusts cheap, as domestic investors focus elsewhere,” she adds. “It’s a lose-lose for the economy, pension funds and their members.”

Further scrutiny important

After clearing the House of Lords committee stage, the Pension Schemes Bill will proceed to the report stage, offering a further opportunity for the Lords to table amendments. AIC’s Stone says this moment of legislative scrutiny is important, as the bill will signal how pension capital will be deployed for years to come. “Why would legislation effectively signal that these are not suitable routes for pension investment? That kind of signalling matters,” he says.

In a joint statement, BPF director of policy Ion Fletcher and AREF chief executive Paul Richards say: “Overall, we are supportive of the objectives of the bill [in its current form] to improve pension outcomes and to bolster economic growth by encouraging greater investment into real estate assets.” The BPF and AREF say this aligns with the government’s push to deploy pension money into productive assets through the formation of companies and building new infrastructure and real estate.

However, Richards argues that directing money into listed investment on the secondary market, or exchange-traded funds, would not represent deployment into “productive assets”.

He adds: “For that to be achieved, investment must go into unlisted entities raising capital for new development or new share issues, through rights issues or IPOs, which are entirely consistent with the Mansion House Accord but these amendments would go against.”

What is a long-term asset fund?