International sanctions are a key tool of global diplomacy, and the UK government has used them extensively to exert economic pressure on nations that violate international norms. Alongside its international allies, the UK has imposed a series of targeted sanctions against individuals, corporations, and entire sectors in countries such as Belarus, Iran, Myanmar, and, most notably, Russia.
While sanctions primarily target geopolitical adversaries, their ripple effects extend deep into financial and insurance institutions impacting pension fund investment and the broader economy of which UK pension schemes are an integral part.
Most UK pension schemes maintain globally diversified portfolios, investing across a wide range of asset classes including equities, bonds, real estate, and other "non-standard" assets. Direct exposure to sanctioned countries like Russia has historically been minimal, often less than 0.5% of total assets. However, the real challenge for pension scheme trustees and managers lies in indirect exposure.
Many pension funds invest through pooled vehicles or index-tracking funds that may include companies operating in or with exposure to sanctioned jurisdictions. Notably, many "emerging market" funds have included investments in Russian and Iranian companies. When sanctions are imposed, it is ultimately incumbent on trustees and managers to ensure compliance. This process can be complex and time consuming depending on their investment protocols.
In the wake of the Ukraine crisis, several major UK pension schemes, including the largest private UK pension fund, the Universities Superannuation Scheme (USS), and the Church of England Pensions Scheme publicly confirmed that they had disinvested from Russian assets. The rationale extended beyond compliance with the sanctions regime into the moral and financial unsustainability of holding assets linked to a regime engaged in aggressive military action.
Given the long-term horizon and the variety of available investments, a suitably diversified portfolio should not require entry into riskier transactions to rectify short-term disruptions. However, volatility can still affect funding levels, particularly for defined benefit (DB) schemes that rely on stable asset growth to meet future liabilities. The statutory and regulatory framework underpinning pension schemes requires trustees and managers to balance the need for risk-adjusted returns with the imperative to protect the scheme’s solvency.
DWF advises entities involved in managing large institutional schemes, as well as providers of smaller schemes such as Self-Invested Personal Pension Schemes (SIPPs) and Small Self-Administered Schemes (SSASs), on compliance matters. Larger schemes typically have more evolved investment infrastructures to ensure compliance. However, for smaller schemes, compliance can be particularly challenging.
Take member-led investment schemes such as SIPPs and SSASs: each member often invests on a bespoke basis, constructing their own portfolio and using the scheme as a tax-efficient investment vehicle. In such cases, compliance with the sanctions regime falls on the SIPP or SSAS provider.
This can be especially difficult where providers lack the in-house expertise to navigate the complexities of sanctions compliance. Further complicating matters is that many SIPP and SSAS arrangements are execution only (where the provider and trustees simply execute the customer's investments and providers often lack discretionary fund manager permissions from the FCA. So there is a limit to what they can do unilaterally. It is therefore essential that providers seek appropriate advice from external consultants and legal advisors.
SIPP and SSAS providers now commonly have investment committees to vet new investments and monitor existing ones. This is a time consuming process that increases management costs which are typically passed on to scheme members.
If trustees and providers lack the right systems, they risk regulatory intervention and fines. Enforcement is a government priority, as evidenced by the resources allocated to the UK’s Office of Financial Sanctions Implementation (OFSI), which more than tripled the number of cases it closed within a year. Pension trustees and managers, like all UK entities, must demonstrate proactive compliance, including the ability to identify and freeze assets linked to sanctioned entities.
There is also a growing emphasis on scenario planning and stress testing. Trustees are increasingly considering geopolitical risk as a core component of investment strategy, alongside traditional financial metrics.
Some schemes have taken proactive steps to build resilience, such as increasing allocations to domestic infrastructure or green energy projects, which tend to be less exposed to geopolitical volatility.
While sanctions primarily target geopolitical adversaries, their ripple effects extend deep into financial and insurance institutions impacting pension fund investment and the broader economy of which UK pension schemes are an integral part.
Exposure to sanctioned assets
UK pension schemes collectively manage over £3 trillion in assets and serve more than 22 million savers. The impact of sanctions on these schemes is multifaceted, affecting everything from investment strategy and compliance to ethical governance and public scrutiny.Most UK pension schemes maintain globally diversified portfolios, investing across a wide range of asset classes including equities, bonds, real estate, and other "non-standard" assets. Direct exposure to sanctioned countries like Russia has historically been minimal, often less than 0.5% of total assets. However, the real challenge for pension scheme trustees and managers lies in indirect exposure.
Many pension funds invest through pooled vehicles or index-tracking funds that may include companies operating in or with exposure to sanctioned jurisdictions. Notably, many "emerging market" funds have included investments in Russian and Iranian companies. When sanctions are imposed, it is ultimately incumbent on trustees and managers to ensure compliance. This process can be complex and time consuming depending on their investment protocols.
In the wake of the Ukraine crisis, several major UK pension schemes, including the largest private UK pension fund, the Universities Superannuation Scheme (USS), and the Church of England Pensions Scheme publicly confirmed that they had disinvested from Russian assets. The rationale extended beyond compliance with the sanctions regime into the moral and financial unsustainability of holding assets linked to a regime engaged in aggressive military action.
Sanctions and long-term investment strategy
Sanctions inevitably lead to increased market volatility, especially in sectors like energy, defence, and commodities. As long-term investors, pension scheme managers and trustees can generally manage this volatility, smoothing it over time.Given the long-term horizon and the variety of available investments, a suitably diversified portfolio should not require entry into riskier transactions to rectify short-term disruptions. However, volatility can still affect funding levels, particularly for defined benefit (DB) schemes that rely on stable asset growth to meet future liabilities. The statutory and regulatory framework underpinning pension schemes requires trustees and managers to balance the need for risk-adjusted returns with the imperative to protect the scheme’s solvency.
Compliance with regulatory requirements
One of the most immediate impacts of sanctions is the increase in compliance requirements. Trustees and managers must ensure they are not inadvertently breaching the sanctions regime—a challenging task given the complexity and evolving nature of the laws. Extensive due diligence and regular portfolio screening are essential, requiring effective coordination between trustees, managers, asset managers, and custodians.DWF advises entities involved in managing large institutional schemes, as well as providers of smaller schemes such as Self-Invested Personal Pension Schemes (SIPPs) and Small Self-Administered Schemes (SSASs), on compliance matters. Larger schemes typically have more evolved investment infrastructures to ensure compliance. However, for smaller schemes, compliance can be particularly challenging.
Take member-led investment schemes such as SIPPs and SSASs: each member often invests on a bespoke basis, constructing their own portfolio and using the scheme as a tax-efficient investment vehicle. In such cases, compliance with the sanctions regime falls on the SIPP or SSAS provider.
This can be especially difficult where providers lack the in-house expertise to navigate the complexities of sanctions compliance. Further complicating matters is that many SIPP and SSAS arrangements are execution only (where the provider and trustees simply execute the customer's investments and providers often lack discretionary fund manager permissions from the FCA. So there is a limit to what they can do unilaterally. It is therefore essential that providers seek appropriate advice from external consultants and legal advisors.
SIPP and SSAS providers now commonly have investment committees to vet new investments and monitor existing ones. This is a time consuming process that increases management costs which are typically passed on to scheme members.
If trustees and providers lack the right systems, they risk regulatory intervention and fines. Enforcement is a government priority, as evidenced by the resources allocated to the UK’s Office of Financial Sanctions Implementation (OFSI), which more than tripled the number of cases it closed within a year. Pension trustees and managers, like all UK entities, must demonstrate proactive compliance, including the ability to identify and freeze assets linked to sanctioned entities.
Operational and strategic adjustments
Beyond compliance and ethics, sanctions have prompted pension schemes to rethink their operational models. Some have reviewed their relationships with asset managers, particularly those with exposure to high-risk jurisdictions. Others have adjusted their strategic asset allocations to reduce geopolitical risk. For instance, the USS recently confirmed that it had reduced its exposure to Israeli-related stocks and debt by over £80 million.There is also a growing emphasis on scenario planning and stress testing. Trustees are increasingly considering geopolitical risk as a core component of investment strategy, alongside traditional financial metrics.
Some schemes have taken proactive steps to build resilience, such as increasing allocations to domestic infrastructure or green energy projects, which tend to be less exposed to geopolitical volatility.
Resilience and future outlook
While the direct financial impact of sanctions on UK pension schemes has been relatively limited, the broader implications are profound. Trustees and fund managers now operate in a more complex, interconnected, and politically sensitive environment.
The experience of navigating sanctions has underscored the importance of agility, transparency, and ethical stewardship. Trustees and managers who can adapt quickly, communicate clearly with members, and align their investments with both financial and societal goals will be better positioned for the future. DWF has advised several funds on protocols and procedures to help them achieve these objectives.
In the long term, we hope the sanctions era will serve as a catalyst for positive change in the pensions industry. By embracing responsible investing, enhancing governance, and building operational resilience, UK pension schemes can continue to fulfill their core mission: securing the financial futures of millions of savers.
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