Balancing act: How investors can navigate pressure to invest more at home

The idea that governments put pressure on domestic pension funds to invest in a certain way, including investing more capital in their home countries, is nothing new. In 2022, the OECD noted that only “a minority of countries” don’t impose any specific ceiling on any assets held by their national pension funds.

But growing global uncertainty, coupled with the size of pension fund assets, has seen governments including Canada, the United Kingdom, South Korea and Denmark all put pressure on pension funds to increase their domestic investment in high-profile policy initiatives.

Alarming statistics have added fuel to the fire.

Canadian pension funds’ domestic equity allocations fell from 28 per cent in 2000 to just 4 per cent by 2023. Although some funds like CPP Investments, which has around 14 per cent of its total assets under management invested in Canada, and PSP Investments, which has around 20 per cent, have significant domestic infrastructure and private equity holdings.

According to the ONS, UK pension funds held just 1.6 per cent of UK quoted shares in 2022, a record low, continuing the downtrend from 32.4 per cent in 1992 and 12.8 per cent in 2008.

“We are seeing increasing pressure in many jurisdictions for pension funds to invest more domestically, driven by policy goals such as economic growth, infrastructure development, and national resilience,” Olivier Fines, head of advocacy at the CFA Institute, tells Top1000funds.com.

the pressure of policy changes

In South Korea, pension funds like the National Pension Fund, Employment Insurance Fund, and Government Employees Pension Fund have been asked to increase their risk exposure by beefing up investments in the country’s junior bourse, KOSDAQ. It lists small and medium companies with growth potential, and more pension fund investment chimes with government efforts to channel more capital into the sector.

In the UK, 17 of the UK’s largest DC workplace pension providers pledged to invest at least 5 per cent of their assets in UK private markets by 2030 under the Mansion House Accord in 2025. The government hopes this voluntary commitment will push billions into UK companies, infrastructure and property.

In another more prescriptive initiative, the Pensions Schemes Bill lays the groundwork to allow regulators to force DC schemes to invest in specific assets like private equity and debt or property.

In Canada’s 2024 Budget, the government began exploring ways to facilitate domestic investment opportunities for Canadian pension funds including in infrastructure, AI and venture capital investments. The federal government’s Major Projects Office aims to fast-track infrastructure approvals and facilitate investment from large institutional investors, including pension plans, and last December, Ottawa eliminated the 30 per cent cap on pension fund investments in Canadian entities.

Under a new 2024 investment mandate, Australia’s sovereign wealth fund Future Fund must consider domestic infrastructure, the energy transition and housing in its investment mix. Recent investments include an increased stake in data centre group CDC and a 10 per cent holding in New South Wales electricity transmission business Transgrid.

In May 2023, Malaysian Prime Minister Anwar Ibrahim urged the Employees Provident Fund to increase its domestic investments to 70 per cent of its portfolio, with a focus on strategic infrastructure.

It’s a similar story in Denmark, reflects Kent Damsgaard, chief executive of Insurance & Pension Denmark, a trade group representing most of the industry. He says pressure on Danish funds to invest more is being driven by rising geopolitical uncertainty, a push to strengthen Europe’s technological competitiveness, and a political ambition to mobilise more of Denmark’s substantial pension wealth at home.

“The government argues that the sector should play a greater role in developing future jobs and technologies in Denmark and Europe. At the same time, several funds are already reducing their exposure to US Treasuries due to concerns about America’s fiscal and political direction, which further accelerates a shift toward a more European‑focused investment strategy,” he says.

Are pension funds responding?

Pension funds are starting to respond. The UK’s LGPS Central is building a new, three-person internal investment team focused on local investment in a strategy that aligns with government policy to invest more at home. The asset manager has just hired Paddy Dowdall from the Greater Manchester Pension Fund to lead the portfolio.

But LGPS Central CIO Jayne Atkinson says she doesn’t want it labelled impact investment.

“The reason is, we are conscious of our members’ underlying need for a financial return and we are very keen to supply that financial return. These are not charitable investments, and we expect a risk-adjusted return going forward.”

Moreover, UK pension funds still flag the lack of investment opportunities at home. Although barriers to invest in private assets have reduced in recent years thanks to legislative and regulatory reform, as well as operational improvements, industry body Pensions UK argues that more needs to be done to create a pipeline of UK investment opportunities.

Reflecting on its efforts to integrate sustainability into its domestic infrastructure allocation, Simon Pilcher, CEO of University Superannuation Scheme, USS, the £78 billion ($105 billion) pension fund for employees in the UK’s university and higher education sector, recently highlighted how the complexities of the UK’s planning system left a 10-12 year wait to get green power to its motorway service station network.

Other commentators sound a more wary tone.

Lee Nam-woo, chairman of the Korea Corporate Governance Forum, stated in the Korean press. “Unlike KOSPI, KOSDAQ includes many companies with future potential but currently weaker fundamentals. Artificially inflating stock prices could create bubbles.”

In 2024 at the Top1000funds.com FIS Toronto, Mark Wiseman, independent board member of CPP Investments and Canada’s Ambassador to the US, went one step further and warned of the risks of governments raiding pension plans.

“When you see trillions of dollars in assets, when you see a government that is running deficits, when you see economic malaise – and we’ve seen this in other jurisdictions –this is the time when pension assets get raided. And I’ll use that term, because that is the risk that I think the Canadian model faces today.” 

Alive to the emerging dangers, in the 2025 edition of the Mercer CFA Institute Global Pension Index, the authors of a special chapter call for a middle way between government pressure on the pension industry to support long-term national interest and the best interests of their participants.

It lays out eight principles that urge for policy incentives, not mandates, and transparency, not constraints. Governments can make particular investments attractive to pension funds without the use of compulsion and should refrain from requiring a floor level of investment in a particular asset class.

Most importantly, the actual investment decision should be left to the pension fund.