Pension funds could "revive" UK markets and growth at no cost to the government by investing 25 per cent of new contributions in UK growth assets in exchange for “generous” tax reliefs, Baroness Ros Altmann has said.

In a blog, Altmann called for a shift in pension investment practices, encouraging pension schemes to channel a "meaningful" portion of taxpayer-supported contributions into UK equities, infrastructure, housing, and scale-up businesses.

This, she argued, would better use the tax and national insurance reliefs already granted on pension savings to support the UK economy.

This builds on Altmann’s earlier calls for the government to "embrace bold pension reforms", in which they should require at least 25 per cent of new pension contributions to be invested in Britain as a "quid pro quo" for tax reliefs.

She also pointed out that gross tax relief for UK pensions each year amount to over £70bn of taxpayer money, although she claimed that much of this ends up funding growth in other countries.

Altmann said that pension managers and trustees once heavily favoured equities, particularly UK-listed shares, but over the past 25 years, they have continuously reduced domestic equity exposure.

This shift, she said, has contributed to a decline in support for UK financial markets and a rise in the cost of capital for British companies, while availability of funding for start-ups and scale-ups has diminished.

She claimed pension fund managers have “lost sight of the scale of taxpayer contributions they benefit from each year", which is higher than the country’s defence budget and policing budget put together.

“How can it be good value for taxpayers, to see such huge sums invested overseas and not here?” she said.

“Taxpayers should not be helping to increase pension managers’ funds under management, and facilitating overseas investment, especially when the UK urgently requires increased long-term investment to boost growth.”

However, she stressed this proposal would not be a mandate: “Requiring at least, say, 25 per cent of the money to be invested in Britain is incentivisation, not mandation.”

“Any pension fund managers or trustees who don’t want taxpayer money added to their pension contributions, can invest 100 per cent overseas, no problem."

Mandation has been a widely discussed topic in the industry since the government shared its final Investment Review report, which proposed increased government intervention powers to support the Mansion House Accord.

These concerns intensified with the introduction of the Pension Schemes Bill, which confirmed the government's plans to introduce a reserve power that would allow it to set binding asset allocations.

Whilst Pensions Minister, Torsten Bell, has reassured the industry that he does not expect to use this power, concerns have remained, with industry experts warning that separate details within the Pension Schemes Bill could be seen as "introducing mandation by the back door”.

Altmann also argued that many UK sectors, including life sciences, technology, clean energy, and defence, are “significantly undervalued” compared to overseas counterparts, and that this policy could help unlock investment in them and also help the government meet its growth and investment objectives.

The UK, she noted, is the only major country whose pension funds fail to overweight their own markets, making it a global outlier.

Additionally, Altmann said so far this year, £100m of London-listed companies have been targeted by bids and other companies have decided to move their main listing from London to New York.

She argued that the situation had reached a “critical point” and “urgent action” is needed as while pension fund support for UK equity markets and businesses has “sunk to record lows”, the cost of capital for UK companies has risen and availability of start-up or scale-up capital has reduced.

She attributed the decline in UK allocations to the de-risking of pension schemes and a shift to passive, global market-weighted equity strategies.

In addition to the benefits for the broader economy, she said this proposal could also provide a "radically different" risk-reward equation for trustees when considering their fiduciary duty.

She pointed out that many in the industry have suggested that fiduciary duty means pension funds should not be asked to invest more in the UK as past UK underperformance justifies very low exposure.

But Altmann suggested that the calculations of future performance would change dramatically if UK investments attracted a subsidy which other investments do not have.

She said that the proposal would immediately deliver higher overall returns, because of the added taxpayer money, but warned that this extra funding will be lost, without the domestic investment.

Altmann also argued that the recommendation has a “solid rationale” as a large portion of pension contributions comes from tax and National Insurance reliefs, which exceed 25 per cent.

She noted that these reliefs are not merely tax deferrals as much of the tax benefit is never recouped in retirement as many contributors receive higher rate tax relief but withdraw funds at lower tax rates, and a 25 per cent tax-free lump sum means some tax is never paid.

Additionally, Altmann said major pension funds in other countries commonly have similar or higher allocations in their domestic markets, so 25 per cent is not out of line with them.

“Rejecting this proposal could mean pension funds losing tax reliefs, as government is seeking to reduce public spending,” Altmann said.

“Ultimately, if the pensions industry keeps insisting on putting taxpayer money of this scale into mostly foreign companies, assets and markets, and rejects the idea of putting at least a quarter of new contributions into the UK, then it is hard to imagine government retaining these generous incentives much longer.”

Altmann added that pension funds could be used as the “silver bullet” to restore confidence in Great Britain, and she said she “hopes the government will be bold enough to do this”.

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