Asset owners need to appreciate that their return targets and responsible investment aims all depend on the nation maintaining sufficient resilience and defensive capabilities.
Insitutional investors, often focusing on the fiduciary duty to their members or sustainability outcomes, have a tendancy to overlook the fundamental truth that achieveing their aims ultimately depends on protection from kinetic, hybrid and cyber warfare.
With its tri-annual actuarial reviews, conventions for projecting future liabilities, mathematically derived contributions approved by elected local representatives, portfolio parameters, concentration limits and stress testing for solvency, the LGPS system could be cited as Exhibit A of a ‘rules-based order’ that works – thus far at least.
Among other things, the continued success of the LGPS and other institutional investors assumes proper market functioning, a peacetime economy and payments systems that work.
What would happen if skilfully aimed cyber-attacks, like the one that hit Jaguar Land Rover (JLR) disabled multiple key industries and/or the UK’s power grid? Believed to have originated from the organised cyber-crime group Scattered Spiders, the Cyber Monitoring Centre calculates this attack cost JLR and its 5,000-strong supply chain around £1.9 billion[1] and contributed to slower UK economic growth in Q3 2025.
At around the same time, Scattered Spiders are believed to have been behind further attacks on Harrod’s, the Co-op and M&S, which inflicted varying degrees of damage to IT systems and missed sales activity. These recent examples suggest that multiple successful cyberattacks across UK industry, the power grid, water supply and the NHS could be catastrophic.
Less visible, but similarly damaging would be prolonged disruption to the international payment systems that form the backbone for Euroclear, SWIFT, central bank networks and other financial system plumbing. Disabling key communications satellites or a successful cyber-hack of a mission critical piece of payment systems could cause massive value destruction if it severely interrupted global transactions.
IT problems reported by high street banks, which have temporarily prevented customers from accessing their accounts, or the recent distress of retired civil servants whose pension payments and lump sum distributions were suspended following transfer of administration services, all give a glimpse of the impact that broader disruption of global payment systems could have across the real economy if sustained for an extended period.
For this reason, the Swedish government includes “cash and alternative payment methods” in its Official Resistance & Resilience Brochure for Citizens[2],distributed to every household and intended to prepare citizens in case of attack, be it terror, cybersecurity, an extreme disinformation campaign or armed conflict.
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It is not just countries close to Russia that are at risk. Cyber-attacks, both successful and thwarted, have multiplied. Russian ships map the cables and interconnectors in North Sea, North Atlantic and Irish Sea with malevolent intent. Acting on behalf of hostile nations, ships have dragged their anchors, cutting cables along the Baltic Seabed. Disinformation campaigns, Chinese spies, terrorist plots (some thwarted, others carried out) and cryptocurrency theft by state-sponsored criminal gangs feature frequently in daily news. They are evidence that hybrid warfare has become almost normalised.
In non-hybrid warfare, Russian missiles can reach the far beyond Ukraine to the UK and Western Europe. Recently, we learned that Iran’s can, too. Ballistic attack scenarios or successful penetration of the UK’s critical infrastructure (including but not limited to payment systems) lie beyond the parameters of the thousands of test scenarios that actuaries run to determine the probability of LGPS funds remaining solvent.
LGPS funds and their pools must take a lesson from the cybersecurity world. Security experts know that the only effective remedy is resilience and preparedness through strong detection and interception of threats. Taking quick defensive action against any hackers that manage to penetrate security walls is crucial.
Protocols, policies and rules neither prevent nor protect us from attacks, be they cyber, terror or otherwise. Instead, resilience comes from vigilance, countermeasures that effectively contain threats, and mitigating possible harm from strikes that penetrate defences, as some inevitably will.
An innovative and proactive defence sector
Israel, and since 2022 Ukraine, provide examples of smaller countries that have taken the threat of attack seriously, whether from ballistic missiles, swarms of drones or hybrid warfare. A sophisticated defence sector forms an integral part of their national economy and is increasingly a major export industry. The UK is attempting to follow these examples by promoting small, innovative ventures that can harness AI and other advances.
In 2025 the UK government established the UK Defence Innovation[3] unit within the MoD “to accelerate the delivery of cutting-edge innovative capabilities so that the UK is both secure at home and strong abroad.” Using competitions for third-party service delivery plus outright offers of funding, UKDI seeks out industry partners and providers of commercial innovation to deliver innovative capabilities, including dual-use technologies. These new capabilities are offered to the UK armed forces and other frontline agencies, while also supporting UK economic growth.
Across UK government, industry, financial markets and civil society we must prioritise the defence of the very rules-based order that we claim to value.
Elizabeth Carey
Reflecting modern-day warfare tactics, MoD procurement increasingly employs “spiral development“ whereby enemy threats are identified along with the expectation that specifications will morph over time. Rather than stockpile warehouses full of kit, the objective is readiness. To avoid a standing start, entrepreneurial firms are identified based on their ability to evolve new products quickly and flexibly, then manufacture them rapidly at scale when needed. Such an approach is particularly relevant to anti-drone defences, since attack drones constantly have their spectrum frequency, flight patterns and other specifications altered to evade detection.
Practically speaking, the UK MoD pre-clears identified commercial partners that can demonstrate competence and flexibility at reasonable value for money. Following successful security clearance of its principals and key suppliers, a firm can be designated as an “Assured Supplier”.
Large and small Assured Suppliers can earn reasonable profits through a business model that is materially de-risked because the off-take customer is paying for the capacity commitment as well as actual products produced. While investors may not generally realise ‘hockey stick’ shape returns, greater profitability often arises where UK Assured Suppliers sell their products and/or capacity at higher prices to allied countries, typically NATO members including the US, with UK government permission.
As the MoD’s spiral development approach illustrates, continual evolution of the UK’s defence and dual-use technologies, with readiness to deploy, plays a critical role in keeping the UK and Europe safe. Institutional investors like LGPS funds and pools can play their part by providing capital to firms with good prospects for becoming Assured Suppliers. Putting ‘their money where their mouth is’ means carefully selecting and supporting those innovative businesses that demonstrate potential to develop the defence capabilities on which our rules-based order (and pension system) depend.
Venture capital supports rapidly evolving technologies
Rather than be shunned, in the US venture capital landscape, which totalled $340 billion[4] (£256 billion) in 2025, defence and dual-use technology (including AI applications) are core sectors.
Defence is a small but growing part of the European/UK venture capital investment landscape. Venture capital investments in Europe and the UK totalled $85 billion (£64 billion) in 2025, of which nearly $24 billion (£18 billion or around 28%) was invested in the UK, according to KPMG.
In Europe/UK, beyond the core sectors of healthtech, legal tech and fintech (all with a common AI thread), KPMG reports that “defence tech, spacetech, and companies focused on dual-use technologies [ ] attracted meaningful interest [especially] in the Nordics… Firms applying AI to defence-related use cases gained traction.” KPMG’s report cites AI and defence tech as likely to be very hot sectors for European venture investment in 2026.
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In the UK, the British Business Bank (BBB) recognises defence as a critical sector for UK industry and national security. The BBB website reminds readers that defence is one of the eight growth-driving sectors of the Government’s Modern Industrial Strategy. Investments by the BBB and other institutional investors contribute directly to a stronger UK defence ecosystem by accelerating innovation and adoption of cutting-edge technologies.
- Following a March 2026 investment in an AI-led defence technology company, The BBB’s CIO said: “The current geopolitical environment has sharpened the demand for defence capability, presenting a clear opportunity for UK innovators and investors. Our role is to ensure that high-potential companies operating in this critical sector have access to the capital they need to develop and deploy their technology.”[5]
- The CEO of the investee company (Hadean) commented further that the BBB’s “funding brings together investors who deeply understand defence, sovereignty, and what it takes to scale mission-critical technology. Their collective support enables us to accelerate delivery for the UK, the US, and allied NATO partners at a time when operational readiness and technological advantage matter more than ever.”
Application to local investment policies
Across UK government, industry, financial markets and civil society we must prioritise the defence of the very rules-based order that we claim to value.
We need to connect the dots more explicitly between cyber-attacks; the vulnerability of our international supply chains; disinformation threats to religious freedom, free speech and fair elections; higher energy prices for producers and consumers; and ultimately continued dependence on fossil fuels whose sale supports regimes that actively oppose any rules-based order – other than their own imposed through extreme corruption, suppression and violence.
Practically speaking, building UK resilience through home-grown defence and technology businesses should be explicitly added to the remit of ‘local investments’ for LGPS pools. In addition:
- Responsible Investment (RI) policies should be revised to recognise the centrality of developing credible UK-sourced defence and dual-use technologies that contribute to the local economy as well as national security and residence.
- RI policies should acknowledge that credible defence and resilience underpin “peaceful and inclusive societies for sustainable development, [ ] access to justice for all, and [ ] effective accountable and inclusive institutions (SDG #16), hence pursuit of all the other SDGs.
- Defence exclusions should be replaced with a commitment to engage positively with investee companies to understand how their products and capabilities are being (or could be) used. The disagreement between the US Pentagon and Anthropic (along with other large US AI technology companies) over agentic target selection illustrates how far the debate over defence use cases has evolved beyond exclusions based on the UN Convention on Certain Controversial Weapons.
- In the DC pension fund market, fee caps should be amended so that they do not preclude venture capital investing. Venture capital is more expensive owing to the smaller size and early stage of investee companies.
In local investment terms, the first-order impact of proactive support for defence-focused firms (and their supply chains) may be measured in terms of higher paid jobs plus growth of R&D partnerships between universities and industry players. Second- and third-order impacts may be more consequential if they strengthen our national resilience and reinforce the UK’s position as a respected and reliable defence partner among democratic nations.
Bulwarks of the rules-based order
LGPS investment policies should acknowledge that achieving successful outcomes and retaining the capacity to pay pensions sustainably for the foreseeable future assumes a peacetime economy, relatively low inflation and normally functioning global markets. These conditions, in turn, depend on vigilance, resilience and security. Security increasingly rests on continual innovation of defence and dual-use technologies delivered by commercial providers that are aligned with our national objectives.
Investment and RI policies need to recognise these facts, which may be uncomfortable truths for some. Grey zones of ambiguity have always been, and will remain, inherent in our defence and security. Rather than exclude the defence sector or specific products, we must understand the inherent ambiguities of our time and engage where practical.
All stakeholders in the LGPS system must accept that we do not live in a perfect world and never will. In the real world, rule of law, orderly functioning of financial markets, British values, high quality local jobs and using technological innovation to protect our society are different sides of the same coin. Only through robust defence of our land, sea, air, undersea cables, cybernetworks, communications sattelites, financial market operations and other critical infrastructure will our prized rules-based order survive to serve future generations.
The opinions expressed in this article are entirely those of the author Elizabeth Carey and do not reflect the views of any of her clients.
[1] JLR cyber bailout risks dangerous precedent, watchdog warns • The Register and Bank of England says JLR’s cyberattack damaged UK GDP growth • The Register
[3] About us – UK Defence Innovation – GOV.UK
[4] As per Venture Pulse Q4 2025
[5] Press release – 11 March, 2026 | British Business Bank