Unlocking Britains Defence: How Pension Savings Are Being Tapped to Bolster National Security

The UK's defence industry is on the cusp of a significant transformation, as pension savings are being tapped to bolster national security. In a move that could unlock billions of pounds in investment, pension funds are in talks to commit more money towards military spending by rewriting the voluntary Mansion House Compact. This compact, signed by the biggest retirement providers in 2023, aimed to encourage pension funds to invest more in growth industries to boost Britain's economy. Now, it could be rewritten to include "national resilience" among its core aims, paving the way for a significant increase in defence spending.

The Mansion House Compact was initially designed to boost growth by pledging a minimum of 5% of defined contribution pension savings to be invested in unlisted equities by 2030. However, with the UK's defence industry facing significant challenges, including a decline in investment due to environmental, social, and governance (ESG) rules, a new approach is needed. The City of London Corporation, which represents the Square Mile, is spearheading the initiative to rewrite the compact and unlock billions for defence spending. According to John Healey, the Defence Secretary, the Government is working to ensure that defence investments are not hindered by ESG rules, which have been a major barrier to investment in the defence industry.

The UK defence industry is a significant contributor to the country's economy, with over 9,000 companies directly employing 285,000 people and turning over £45bn a year. However, the industry has faced significant challenges in recent years, including a decline in investment and a lack of support from the private sector. The new initiative to tap into pension savings could provide a much-needed boost to the industry, allowing it to compete with other countries and invest in new technologies and capabilities. As Sir Keir Starmer has pledged to increase defence spending to 2.5% of GDP, with a goal of reaching 3% in the next decade, the UK defence industry is poised for significant growth and investment.

The move to tap into pension savings for defence spending marks a significant shift in the way that pension funds are invested. Traditionally, pension funds have focused on low-risk investments, such as tracker funds, to provide a stable return for retirees. However, with the UK's defence industry facing significant challenges, a new approach is needed. By investing in defence companies and initiatives, pension funds can provide a significant boost to the industry while also generating returns for retirees. As Alastair King, the new Lord Mayor of London, has suggested, pension funds could devote a much higher share of their funds to private assets, including defence companies, to unlock up to £150bn of investment in high-growth companies.