Seventeen workplace pension providers have promised to invest at least 10% of defined contribution (DC) default funds in private markets by 2030, with at least half of this earmarked for UK assets.
M&G, Aviva, NatWest Cushon, TPT Retirement Solutions, now:pensions, Mercer and others have committed to do this by signing the Mansion House Accord. This voluntary agreement doubles pledges made in the 2023 Mansion House Compact, which had a 5% private equity target.
Chancellor Rachel Reeves is planning to introduce legislation later this year to compel pension funds to invest up to £50bn in private assets if they do not make sufficient progress on their own, according to the Financial Times. Mandatory targets would be a last resort.
Signatories claimed that private market investments would enhance returns for pension savers whilst stimulating the UK economy.
Andrea Rossi, chief executive (CEO) of M&G, said: “Private markets play a fundamental role in shaping the world around us through long-term investment in real estate and infrastructure projects, alongside lending to and investing in companies that contribute to economic growth. By enabling and encouraging greater investment into these assets, individuals could benefit from enhanced returns, greater diversification and better value.”
Another benefit of investing domestically is helping people feel more connected with their retirement savings, said Ben Pollard, CEO of NatWest Cushon, the workplace savings and pensions fintech. “These types of investments are real and tangible and show savers how hard their money is working to improve their standard of living in the UK,” he explained.
For instance, NatWest Cushon invests in a sweet pepper farm in Suffolk whose carbon footprint is 75% lower than conventional farms because it reuses waste heat from a nearby water treatment works.
“The low carbon farm in Suffolk is a great example of a real and tangible investment that brings pensions alive for savers. Our customers can visit and physically see how their pension is being invested and then go into a supermarket and literally eat the fruits of their investment,” Pollard said.
Many pension schemes already invest in productive finance and most are open to investing more in the UK, but the government needs to play its part in facilitating these investments, said David Lane, CEO of TPT Retirement Solutions.
“Hurdles remain around value for money considerations and the availability of suitable investment opportunities. These should be a focus for government policy to spur more investment,” he stated.
“The most pressing issue to deal with is that provider pricing practices leave very little room in the annual management charge for investment fees. There needs to be a shift to a value for money approach that considers the returns from an investment and not just its fees.”
Today’s agreement could be “the thin end of the wedge” as far as government interference in pension funds’ investment strategies goes, warned Jason Hollands, managing director at wealth management firm Evelyn Partners.
“However desirable the government’s objectives might be – like boosting economic growth – from a public policy lens, the fear is that pension schemes could be distracted from the interests of the end saver, which should be their primary concern,” he said.
“Pensions have a fiduciary duty to deliver decent risk-adjusted returns for their members, not serve domestic public policy goals. Sizeable allocations to illiquid investments are not without risk.”
Reeves’ threat of mandatory targets also raises alarm bells. “The gnawing concern is that this ‘voluntary’ commitment is really a case of the government wielding a stick rather than offering a carrot,” Hollands said.
“Some heavy-hitting commentators like baroness Altman have called for a mandatory allocation of 25% of UK savers’ pensions into UK assets in order to qualify for tax reliefs. Others in the City are lobbying for measures that would refocus stocks and shares ISAs on UK investments.
“Whether by stick or carrot measures, it is possible that we have passed the era of peak investment flexibility in tax-efficient UK accounts.”