With a private market investment of '25 billion,' pension plans promise to support Britain

Higher returns could result from pension savers' dedication to investing in private assets

At least five percent of savers' money will be invested in British private markets, according to seventeen of the biggest workplace pension providers in the UK.

Half of the up to £50 billion in economic investment made possible by the so-called Mansion House Accord will go toward significant infrastructure projects in Britain.

By 2030, signatories will commit to allocating 10% of their workplace portfolios to economic-boosting assets like real estate, infrastructure, and private equity.

By 2030, at least 5% of these portfolios will be ringfenced for the UK, which is anticipated to bring £25 billion directly into the country's economy.

The deal, which was signed today (May 13) at a roundtable in City Hall with Pensions Minister Torsten Bell and Chancellor Rachel Reeves, is a component of the Labour government's Plan for Change initiative, which aims to stimulate economic growth.

What does the UK and pension savers stand to gain from the Mansion House Accord?

The Treasury stated that money from the proposed investment could be used to promote clean energy initiatives nationwide, increasing energy security and assisting in the reduction of household expenses.

Investment could also provide growth finance to Britain's top science and technology companies, "creating jobs, boosting businesses and putting more money into peoples pockets," the statement continued.

The advantages of making the commitment to invest in private markets could result in increased returns for pension savers.

"Greater investment in private markets can deliver security through diversified asset holdings and potentially drive higher returns," the Treasury said, pointing out that comparable Australian schemes invest significantly more in domestic companies and private markets than do UK schemes.

Bell stated: "Pensions are extremely important because they support not only the retirements that we all anticipate but also the investments that are essential to our future prosperity.

"The decision by the pensions industry to invest in more productive assets, such as expanding businesses or infrastructure, is greatly appreciated. This promotes faster growth for Britain and better results for savers.

In July 2023, the government claimed that DC reforms could raise a typical earner's pension pot by 12 percent over the course of a career when the previous Mansion House Compact was signed. With regard to the "more ambitious" target levels it has set for private market investment, this most recent initiative makes this claim.

However, some experts have their doubts. Jason Hollands, managing director at wealth management firm Evelyn Partners, stated, "We must remind investors that past performance does not necessarily predict future performance, and the robust returns that investors have achieved on private markets over the past 20 years were buoyed by an era of ultra-low interest rates."

Although we must hope that this action will result in higher returns for members of the pension plan, significant investments in illiquid assets carry some risk.

The Mansion House Accord has the support of which pension providers?

The following pension providers have signed the new commitment: the Universities Superannuation Scheme (USS), Aegon UK, Aon, Aviva, Legal & General, LifeSight, M&G, Mercer, NatWest Cushon, Nest, now:pensions, Phoenix Group, Royal London, Smart Pension, the Peoples Pension, SEI, and TPT Retirement Solutions.

According to Amanda Blanc DBE, CEO of Aviva Group, "The pension and investment sector has a significant chance to boost UK growth and provide better results for pension savers.

The Treasury said these are "more ambitious targets than 2023 Mansion House Compact and will unlock investment into UK businesses and major infrastructure projects" when announcing the development.

Just eleven funds made a commitment in 2023 to invest just 5% of their workplace defined contribution default fundsthe off-the-shelf funds that most savers usein unlisted private market companies by 2030.

The new commitment doubles the target from 5 percent to 10 percent, includes a specific commitment to invest 5 percent in the UK, and involves the vast majority of the industry. It also expands the scope of assets.

The action takes place ahead of the final report of the Pensions Investment Review, which will establish megafunds to encourage more investment, increase pension pots, and stimulate economic growth.

Reeves stated: "We are deciding to support British companies and British workers through our Plan for Change.

I applaud this audacious move by some of our largest pension funds, which will release billions for clean energy, major infrastructure, and innovative startups that will spur growth, increase pension funds, and provide working people with more retirement security.

According to Zoe Alexander, the PLSA's director of policy and advocacy, "Billions of pounds are already invested in UK growth assets by UK pension schemes. This agreement shows the DC sector's ambition to do even more and its belief that the UK will offer suitable investment opportunities in line with schemes' fiduciary duty to members.

Will the Mansion House Accord succeed?

The goals set forth in the Accord are a "voluntary expression of intent" rather than laws. Since a pension plan's primary responsibility is to its members, it can only achieve these goals if there is a healthy flow of investment opportunities.

Although the initiative is generally well received by the Accord's signatories, they have made it apparent that the government will be crucial to its success.

"Achieving the goals of the government, upholding fiduciary duty, and guaranteeing substantial returns for members are not incompatible goals. However, there are still issues with availability of appropriate investment opportunities and value for money," stated David Lane, CEO of TPT Retirement Solutions.

Price is one of the main obstacles that Lane cites. Despite the potential for greater returns, private market investments are typically more expensive. DC pension plans have previously faced difficulties as a result of this, since they are under pressure to maintain low management fees.

According to Lanes, "a change to a value for money approach that takes into account the returns from an investment and not just its fees is necessary."

Other industry participants note that meeting the goals will depend on a robust pipeline of appropriate investment opportunities.

According to Yvonne Braun, director of policy at the Association of British Insurers, "it is now crucial that the government supports the industry's ambition by facilitating a pipeline of suitable investment opportunities, tackling investment barriers, and effectively delivering wider pension reforms."