Katie Williams
Seventeen of the UK’s largest workplace pension providers have said they will invest at least £25 billion of savers’ money in British private markets investments.
The so-called Mansion House Accord unlocks a total of £50 billion of investment in the economy, with half of that directed to major British infrastructure projects.
Signatories to the Accord will pledge to invest 10% of their workplace portfolios in assets that boost the economy such as infrastructure, property and private equity by 2030.
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At least 5% of these portfolios will be ringfenced for the UK, expected to release £25 billion directly into the UK economy by 2030.
The accord, signed today (13 May) at a roundtable in City Hall with chancellor Rachel Reeves and Torsten Bell, minister for pensions, is part of the Labour government’s Plan for Change project to drive economic growth.
What does the Mansion House Accord mean for the UK and pension savers?
Under the planned investment, funds could go to support clean energy developments across the country, delivering greater energy security and helping to lower household bills, the Treasury said.
Investment could also deliver growth finance to Britain’s world-leading science and technology businesses – “creating jobs, boosting businesses and putting more money into people’s pockets,” it added.
For pension savers, the benefits from the commitment to invest in private markets could mean higher returns.
Comparable Australian schemes invest significantly more in private markets and domestic companies than UK schemes, the Treasury said, adding research suggested “greater investment in private markets can deliver security through diversified asset holdings and potentially drive higher returns”.
Bell said: “Pensions matter hugely, they underpin not just the retirements we all look forward to, but the investment our future prosperity depends on.
“I hugely welcome the pensions industry decision to invest in more productive assets, from growing companies to infrastructure. This supports better outcomes for savers and faster growth for Britain.”
When the previous Mansion House Compact was signed in July 2023, the government claimed DC reforms could increase a typical earner’s pension pot by 12% over the course of a career. This latest initiative claims to be “more ambitious” in terms of the target levels it has set for private market investment.
Despite this, some experts have reservations. “As we are obliged to remind investors, ‘past performance is not a guide to the future’, and the strong returns made on private markets by investors over the last two decades were supported by a period of ultra-low interest rates,” said Jason Hollands, managing director at wealth manager Evelyn Partners.
“While we must hope this move will manifest itself in improved returns for pension scheme members, sizeable allocations to illiquid investments are not without risk.”
Which pension providers have backed the Mansion House Accord?
Pension provider signatories to the new commitment include: Aegon UK, Aon, Aviva, Legal & General, LifeSight, M&G, Mercer, NatWest Cushon, Nest, now:pensions, Phoenix Group, Royal London, Smart Pension, the People’s Pension, SEI, TPT Retirement Solutions and the Universities Superannuation Scheme (USS).
Amanda Blanc DBE, Aviva Group chief executive, said: “This is a major opportunity for the pension and investment industry to support UK growth while delivering improved outcomes for pension savers.”
Announcing the development, the Treasury said these are “more ambitious targets than 2023 Mansion House Compact [and] will unlock investment into UK businesses and major infrastructure projects”.
In 2023, only eleven funds committed to the aim of investing just 5% of their workplace defined contribution default funds – the off-the-shelf funds providers offer to the vast majority of savers – in unlisted private markets companies by 2030.
The new commitment involves the vast majority of the industry and brings more assets into scope, doubles the target from 5% to 10%, and includes a specific commitment to invest 5% in the UK.
The move comes ahead of the Pensions Investment Review final report, which will create megafunds with the aim of driving more investment, boosting pension pots and growing the economy.
Reeves said: “Through our Plan for Change, we are choosing to back British businesses and British workers.
“I welcome this bold step by some of our biggest pension funds, which will unlock billions for major infrastructure, clean energy, and exciting startups – delivering growth, boosting pension pots, and giving working people greater security in retirement.”
Zoe Alexander, director of policy and advocacy at the PLSA, said: “UK pension schemes already invest billions in UK growth assets. This accord demonstrates the collective ambition of the DC sector to do even more, as well as its confidence that the UK will provide the right opportunities to invest, consistent with schemes' fiduciary duty to members.”
Will the Mansion House Accord work?
The targets included in the Accord are not mandated, but a “voluntary expression of intent”. A pension scheme’s first duty is to its members, so schemes will only be able to meet these targets if there is a suitable pipeline of investment opportunities.
While signatories of the Accord are positive about the initiative overall, they have been clear that its success will depend on the government.
“Meeting the government’s objectives while also maintaining fiduciary duty and ensuring strong returns for members are not mutually exclusive ambitions. However, hurdles remain around value for money considerations and the availability of suitable investment opportunities,” said David Lane, chief executive of TPT Retirement Solutions.
One key barrier that Lane mentions is pricing. Although private market investments have the potential to deliver higher returns, they generally come with more expensive costs. This has created challenges for DC pension schemes in the past, as they are under pressure to keep their headline management fee low.
In Lane’s view, “there needs to be a shift to a value for money approach that considers the returns from an investment and not just its fees”.
Other industry participants point out that a strong pipeline of suitable investment opportunities will be key to the targets being met.
“It is now critical that the government supports the industry’s ambition by facilitating a pipeline of suitable investment opportunities, tackling barriers to investments, and delivering wider pension reforms effectively,” said Yvonne Braun, director of policy at the Association of British Insurers.
