There's a suggestion that, if providers fail to deliver on the Mansion House Accord, productive investment may be forced upon them.
Private market allocations remain “well below” the 5% and “a lot of thinking” will be required to move to the new 10% Mansion House Accord ambition, with mandation “lurking in the background”, the industry says.
Today (13 May) a total of 17 of the largest UK workplace pension providers signed the Mansion House Accord – expressing their intent to invest at least 10% of their defined contribution (DC) default funds in private markets by 2030, with at least 5% allocated to the UK.
But fears remain that the government will set out "backstop" plans to force schemes to invest in private markets should they fail to meet these voluntary targets.
Mandation fears
In an article for Professional Pensions today (13 May), IFM Investors executive director of public affairs and former shadow pensions minister Gregg McClymont said news the forthcoming Pension Schemes Bill could include a backstop "direction of investment" power marked a significant escalation in the government's campaign to deliver more domestic investment.
He said the existence of this backstop power had "somewhat overshadowed" the signing of Mansion House II but noted the threat of mandation was the means by which government maintained pressure on schemes to deliver the Mansion House Accord.
He said: "The wider context in which urging pension funds to act patriotically has become politically plausible – across parties – is the drift away from free market globalisation as a dominant idea. The Great Financial Crash and the subsequent fiscal crises, Trump, migration crises, and Brexit have one way or another, all contributed to this developing perspective, in the UK and elsewhere.
"In taking a backstop power to direct investment, the UK government has done something all but unthinkable just a decade ago."
Herbert Smith Freehills pensions partner Michael Aherne agreed that, while the Mansion House Accord would be seen as a key step towards its ambition of boosting productive UK investment, it was still only voluntary and subject to the fiduciary and consumer obligations of providers.
He said: "Lurking in the background is the spectre of mandation. There's a suggestion that, if providers fail to deliver, productive investment may be forced upon them. The government could, via legislation, trump the fiduciary duty but mandating UK investment, in circumstances where providers had concluded that it was not in the best interests of savers, would be controversial."
Barnett Waddingham partner and head of DC investment Sonia Kataora said the chancellor was "no longer pulling her punches when it comes to promoting UK growth" - noting that, while for now, the Mansion House Accord is just 'voluntary', the government "seems unabashed to further enforcing investment if its ambitious targets aren't met".
Kataora warned, however, that the industry could not afford to lose its diligent focus on member outcomes as result of the push to private markets.
She said: "We are already hurtling towards a retirement crisis, with low contribution rates and a lack of realistic financial planning - savers simply cannot afford underwhelming returns on top of that. The solution to this lies in better value assessments, rather than a myopic focus on costs. So long as the net returns of private markets are good, most UK pension savers will get on board with using their money to improve the health of UK infrastructure and other productive assets."
Learning from the past
Van Lanschot Kempen Managing Director Pat Race agreed the stark reality was that allocations to private markets remain well below the previous 5% target agreed in the original Mansion House Compact – adding that "a lot of thinking" would be required to move things onto the new "10% total with half in the UK ambition".
Race said it was hard to ignore the parallels between today's announcement and the earlier efforts of Paul Myners, the former Gartmore chief executive who was City Minister between 2008 and 2010.
In his eponymous 2001 report, Myners called for a new approach to UK pension investment, advocating for greater diversification and a more balanced exposure to private markets.
Despite this, Race said there been only a slow shift towards these sort of assets – with UK pension funds reaching just 0.5% allocation to venture capital, while US funds surged ahead to 5%.
Race said many of the same barriers – liquidity constraints, cost barriers, and operational complexity – remain today. He added the industry must learn from the past to maximise the chances of successful adoption this time around.
He explained: "If voluntary progress continues to stall in the UK, the government has indicated that mandating will be the way forward. But it should be a final measure, reserved to level the playing field if parts of the market fail to engage without good reason.
"There's a balance to be struck: moving too quickly risks unintended consequences for members as well as the broader economy. If every UK pension scheme floods into the same scarce private market opportunities, returns will suffer."
Race added: "To maximise the chances of success, pension funds will need to build meaningful relationships with asset managers over time while simultaneously doubling down on education. This is likely to take years, not months. Private markets' exposure is still fringe territory for UK pension holders. As such, they need to be informed thoroughly and transparently on the potential risks and opportunities as they look to build their pensions."
UK asset concerns
XPS Group senior investment consultant Mark Searle said he believed now was an exciting time regarding the private market opportunity set – noting there was a "significant pipeline" of assets becoming available on the secondary market from defined benefit (DB) schemes as they approach buyout.
He said these DB assets often had a focus on delivering cashflows, making them especially suitable for approaching, through and after retirement portfolios.
But he said he was some concern about the supply of UK-specific assets.
Searle explained: "Regarding the UK focus, we're concerned about the volume of the supply of UK private market assets and we are glad to see this acknowledged by signatories of the Accord."
Isio director Iain McLellan said it would be interesting to see more detail on the definition in the Accord for what assets meet the UK private market allocation and how the government can help ensure that a pipeline of these assets can be expanded.
He noted: "Without this expansion, any increase in investment will just raise prices, resulting in the opposite of the wider aims to improve value for members."
Defined Contribution Investment Forum (DCIF) executive director Louise Farrand agreed there needed to be a steady stream of opportunities.
She said: "Improving retirement outcomes and boosting the UK economy are both vital goals. However, we do not believe that they necessarily always go hand in hand. For the Mansion House Accord to succeed, the devil will be in the detail. It is up to the government and industry to work closely together to ensure a steady stream of appropriate investments for UK DC savers. After all, this is DC members' money: their investments, their risk, and their retirements.
"We look forward to working with the rest of the industry on a strong pipeline of investments which will benefit both the domestic economy and DC pension savers."
Pensions Management Institute chief strategy officer Helen Forrest Hall said it believed the real test lay in delivering the regulatory and economic conditions that make UK markets genuinely attractive to pension funds.
Forrest Hall said: "Without the right economic conditions, pension funds cannot – and should not – be expected to prioritise UK assets over better-performing alternatives."
"Commitments are easy to sign," Forrest Hall said, but noted: "Delivering the right framework for success is harder."
She said: "The government must focus on creating the conditions that allow pension funds to act in members' best interests—ensuring that UK markets are not just an option, but an attractive and sustainable one."
Independent Governance Group (IGG) said while it supported the government's commitment to UK growth, its legal obligation as trustees was to the scheme beneficiaries, not the UK economy.
IGG head of policy and external affairs Lou Davey said further clarity was needed around priorities for investment.
She said: "The government has made good progress on developing the framework to enable pension schemes to invest, including through the British Growth Partnership, but further clarity around the types of initiatives that government sees as a priority for investment is required."
Get investing
LCP partner and head of DC investment strategy Stephen Budge said the Mansion House Accord was "undoubtedly a bold and positive step for pension savers" but said the industry now had to stop talking and get investing.
He said: "By committing more to private markets, members stand to benefit from access to new sources of long-term return – like infrastructure, growth businesses and green energy. What's not to like? Done well, this could mean better outcomes for members over time, through stronger growth and more resilient portfolios.
"But after all the Mansion House speeches and commitments, Patient Capital Taskforces and working groups, we're still floundering at the agreeing stage. It's time to move beyond the talking and start seriously investing – getting money working harder, sooner, for our members."
