'Soft compulsion' needed to nudge pension cash into UK companies, says L&G

FILE PHOTO: City of London financial district, Britain

LONDON (Reuters) - Britain has been investing in the wrong things for two decades and 'soft compulsion' is needed to nudge pension fund money towards growth sectors, a top investment executive said on Wednesday.

The government is looking at how to encourage pension funds to invest more in UK companies to boost growth, and one consideration is to mandate that a percentage of their funds be put into domestic technology and life sciences start-ups.

However, some pension funds and asset managers have bristled at the idea they could be forced to act.

"The first thing is some soft compulsion... We just need to nudge them so that they allocate part of their assets into growth equity," Nigel Wilson, CEO of Legal & General investment firm told a Wall Street Journal event.

Wilson said tax incentives could prove an effective nudge, and also cited the success of the UK's auto-enrollment into pension schemes.

"We've been investing in the wrong things for 20 years now... We don't have to do radical things to improve that supply and it would make a real difference," Wilson added.

Britain is already updating its rules to make London a more competitive global financial sector for attracting listings after UK chip designer ARM opted to list in New York, and London faces competition from European Union centres due to Brexit.

Finance industry officials are looking at other ways to change the investment culture to boost competitiveness, with the use of pension funds a key focus. Pension schemes often prefer safer assets such as UK government bonds.

Much greater consolidation of pension schemes is also needed to achieve the scale to invest more in growth sectors, said Julia Hoggett, CEO of the London Stock Exchange.

"We're not proposing rocket science," she said.

The pensions sector opposes mandatory allocations, saying it should be up to the schemes to decide on investments in the best interest of savers.

Separately, Amanda Blanc, CEO of insurer Aviva, said on Wednesday she did not support mandated participation in a proposed growth fund.

Bank of England Governor Andrew Bailey told the WSJ event that Britain probably has too many small pension funds that lack economies of scale and so decide to keep investments simple.

"It probably has become too focused on relatively low yielding assets... The rethink is essential," Bailey said.

(Reporting by Huw Jones and Iain Withers; Editing by David Gregorio)