What does productive finance mean for pension schemes?

Productive finance refers to investment in assets that support long-term economic activity, including infrastructure, private equity, venture capital, affordable housing and growing UK businesses.

What are the main barriers to UK DC pension schemes investing in productive finance?

Several factors limit investment in productive finance, including externalities that are not fully reflected in returns, information gaps in which investors lack sufficient data or expertise, and coordination challenges in which action depends on multiple parties moving together. Regulatory and structural constraints can also restrict access, particularly for smaller schemes. Scale is important because larger schemes are generally better able to diversify, build specialist capability and access private markets on more efficient terms.

Why do UK defined contribution (DC) pension schemes invest less in UK assets than Australia or New Zealand?

Differences are due to several factors, including market maturity and tax incentives. For example, Australia’s mandatory DC system has developed over a much longer period and at a significantly greater scale, while New Zealand offers a tax incentive for investing in domestic equities rather than global equities.

UK pension schemes and ‘productive finance’ – a framework for effective intervention

Pensions & benefits DC investment consulting DC pensions Mansion house reforms

Stephen Budge Partner

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Steve Webb Partner

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16 March 2026 1 mins estimated reading time

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With the workplace pension sector now accounting for over £2 trillion in assets, the Government has become increasingly interested in whether this capital could be used more ‘productively’ to support economic growth.

A new report, UK Pension Schemes and Productive Finance – a framework for effective intervention, produced jointly by LCP and Frontier Economics, takes a critical look at current interventions, barriers, and the limitations of comparing the UK with international peers.

The experts found that:

Big differences in investment strategies between UK pension schemes and those in other countries, for example, Australia, are driven more by the much greater scale of these schemes compared with the UK, rather than by a general unwillingness by UK schemes to invest locally.
As UK schemes grow, they will, in any case, tend to diversify, investing more in the sort of assets that the Government wishes to promote, without needing to be forced to do so. Some larger UK schemes already have significant allocations to private markets and infrastructure, and more are set to follow as they grow.
Just because pension schemes in other countries allocate a certain percentage to domestic ‘productive’ assets, it does not follow that this is the right answer for UK schemes. Instead, policy should identify ‘market failures’, i.e. those markets where the socially optimal level of investment is not delivered.

Read the paper

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Your questions answered

: Productive finance refers to investment in assets that support long-term economic activity, including infrastructure, private equity, venture capital, affordable housing and growing UK businesses.

: Several factors limit investment in productive finance, including externalities that are not fully reflected in returns, information gaps in which investors lack sufficient data or expertise, and coordination challenges in which action depends on multiple parties moving together. Regulatory and structural constraints can also restrict access, particularly for smaller schemes. Scale is important because larger schemes are generally better able to diversify, build specialist capability and access private markets on more efficient terms.

: Differences are due to several factors, including market maturity and tax incentives. For example, Australia’s mandatory DC system has developed over a much longer period and at a significantly greater scale, while New Zealand offers a tax incentive for investing in domestic equities rather than global equities.