British pensions are funding America's future - here's how Rachel Reeves can fix it: David Richards
At last week’s Bessemer HardTech Conference in London, a pointed question from the audience stopped the discussion cold.
An attendee directly challenged a senior UK fund manager: why do British pension funds persistently invest such substantial amounts of our national savings into American companies, rather than supporting homegrown British innovation? The answer was vague and evasive, but the implication was clear.
Our pension funds, intended to secure our economic future, are instead financing our national decline.
Consider Google’s acquisition of DeepMind in 2014 for £400 million. Many British pension funds owned shares in Google at that time, effectively using British retirement savings to finance Google’s purchase of one of the UK’s most promising technology companies. Today, DeepMind is valued at between £20 billion and £30 billion, securing Google’s dominance in artificial intelligence. British pension savers have helped fund the loss of an asset that could have formed the backbone of our own AI industry.
This is not an isolated incident. British pension schemes currently allocate only 8 per cent of their equity investments to domestic companies, down from 40 per cent in 2012. The remaining 90 per cent flows abroad, predominantly to American companies, who then use these resources to acquire British innovation. Each additional pound invested overseas strengthens competitors who routinely snap up our most promising ventures.
The consequences of this cycle are stark. When ARM was acquired by Softbank, British pensions profited while simultaneously losing a domestic semiconductor champion. When Skyscanner was acquired by China’s Ctrip, a similar dynamic unfolded. Each time, British savers indirectly financed the erosion of their own national economy.
The root of this damaging pattern is Britain’s chronic shortage of growth-stage investment, specifically at the critical Series B stage. Series B funding is vital. It is the moment a company has proven market demand and needs capital to scale rapidly, expand market share and attract talent. At this trans stage, British companies are vulnerable. Recent data reveals that Series B investments accounted for less than 2 per cent of UK venture capital deals. By contrast, American companies raised over £7 billion across nearly 200 Series B rounds in the first half of 2024 alone.
This capital shortage leaves UK companies open to acquisition by overseas firms, funded in part by British pension savings channelled into international markets.
The declining Alternative Investment Market (AIM) highlights this crisis. AIM-listed companies have dropped from over 1,694 in 2007 to just 679 today. While British pension funds justify overseas investments as diversification, their choices systematically undervalue and undermine domestic opportunities. The current approach is not merely diversification; it is strategic self-harm disguised as prudent investment.
The Mansion House Agreement is a step in the right direction, committing to direct 10 per cent of UK pension assets into domestic private investments. However, this welcome initiative will unfold over ten years, and Britain simply cannot afford to wait that long.
Moreover, the Mansion House accord targets private companies, arguably excluding around 1,000 listed UK companies under £250 million market cap, which largely lack access to capital.
Adam Pollock of Oberon Capital has proposed an immediate remedy: establish a dedicated investment trust funded by Britain’s largest pension schemes. If the 15 largest pension funds each committed £350 million, a £5 billion fund could be rapidly deployed to support British small-cap companies, breaking the destructive cycle.
Additionally, there is currently £350 billion held in UK ISAs, the majority invested in US tech giants - Meta, Amazon, Netflix, and Google - and Nasdaq trackers. Historically, the forerunner to the ISA, the Personal Equity Plan (PEP), restricted investments exclusively to UK equities.
Gordon Brown later allowed overseas equities into ISAs. If this rule were reversed, mandating that all new ISA equity purchases be UK-focused, it would channel approximately £20 billion annually into the UK market, at no cost to the government, leveraging what is, after all, a UK tax break.
Such investment measures would offer transformational benefits. Instead of British pensions indirectly funding overseas companies that acquire our best enterprises, this capital would directly support domestic businesses, enhancing our economic strength and independence.
Returns would flow to British savers, and our economic resilience would be significantly strengthened.
British pension fund managers must acknowledge their fiduciary duty is broader than portfolio returns alone. It must include safeguarding and promoting Britain’s economic future.
If fund managers lack the conviction to invest meaningfully in our economy, we should hardly be surprised when our competitors step in to claim that future, financed ironically by our own retirement savings.
David Richards is managing partner of Yorkshire AI Labs