The Treasury and nine of the UK’s largest defined contribution pension providers have agreed to invest 5% of default funds in private equity by 2030, the chancellor has said, just as the asset class begins to offer negative average returns for the first time since 2008. New calls for evidence have also been published on trustee knowledge and on defined benefit investments.

The deal between providers managing £400bn in assets and the government was announced by the chancellor in his Mansion House speech on Monday night. It could inject an extra £75bn into “high growth businesses”, according to the Treasury, which also claims exposure to such investments could improve DC savers’ pension pots by £16,000 on average. 

 

Aviva, Scottish Widows, Legal & General, Aegon, Phoenix, Nest, Smart Pensions, M&G and Mercer are the founding signatories of the agreement known as Mansion House Compact. 

 

Chancellor Jeremy Hunt said: “British pensioners should benefit from British business success. By unlocking investment, we will boost retirement income by over £1,000 a year for [a] typical earner over the course of their career. This also means more investment in our most promising companies, driving growth in the UK.”   

 

It is unclear if higher allocations could be implemented easily. Consulting firm Bain & Company estimated for late 2022 that globally, there was $3.7tn (£2.9bn) of ‘dry powder’ waiting to be deployed into private equity already. Consultancy McKinsey agreed that in private equity, dry powder inventory jumped.  

 

The firm said: “That number is likely to have grown even higher in the second half of 2022, as deal flow dried up more abruptly than fundraising slowed.” 

 

Global private equity performance last year turned negative for the first time since 2008, posting −9% through September, according to McKinsey. The British Private Equity & Venture Capital Association said as at December 2021, funds with vintages between 1980 and 2017 delivered an internal rate of return of 14.9% since inception. Pitchbook, part of Morningstar, said European private equity dealmaking slowed in the first quarter of this year, with deal value at €109.7bn compared with €196.24bn in 2022. 

 

As part of the ‘Mansion House Reforms’, the chancellor has asked the British Business Bank to explore “the case for government to play a greater role in establishing investment vehicles”, and the compact document mentions a “joint investment vehicle”. 

 

The Treasury argues that a focus on price has to date limited private market allocations in DC. It said investment decisions made by pension firms should be based on “overall long-term returns and not simply costs”.  

 

A value for money framework to improve comparability was consulted on by the Pensions Regulator and the Financial Conduct Authority earlier this year. The response was published on Tuesday. 

    

The typically high-fee private equity investments could also be helped by the exclusion of performance fees from the 0.75% default charge cap, announced in January this year, when a ‘disclosed and explain’ requirement on illiquid assets was also introduced for DC schemes.  

 

 

 

Pension trustees, who are duty-bound to act in the interests of scheme members, might not all agree that start-ups are an attractive investment opportunity, but the government is keen to change this. A call for evidence was launched on Tuesday “to explore how we can support pension trustees to improve their skills, overcome cultural barriers and realise the best outcomes for their pension schemes and subsequently their members”.    

 

On Tuesday, a call for evidence was published about the possible role of the Pension Protection Fund and DB schemes in productive investment, “whilst securing members’ interests and protecting the sound functioning and effectiveness of the gilt market”, the Treasury noted.   

 

For the £369bn Local Government Pension Scheme in England and Wales, a new consultation has been launched, with the chancellor having announced in the March Budget that the government would aim for speedier consolidation into fewer asset pools by March 2025.    

 

The consultation will propose to set an ambition to double existing LGPS investments in private equity to 10%, “which could unlock £25bn by 2030”, according to the government, and that each pool must exceed £50bn of assets, which is likely to force some of the current eight asset pools to merge.    

 

Jo Donnelly, board secretary of the LGPS Advisory Board, said with the £50bn threshold, changes to the structure of the existing eight asset pools would need to be “carefully considered and managed to ensure that arrangements currently working well for funds – delivering lower costs, stronger performance and increased resources – are not disrupted”. 

 

She added it was essential that any plan to consolidate pools does not delay LGPS funds wishing to increase the pace at which they pool their assets and is done “with the needs of LGPS funds front and central”. 

 

Donnelly also noted that there were other considerations where pools are unlikely to meet the threshold, such as the Wales Pension Partnership. 

  

The costs of potentially merging existing asset pools is unknown, she remarked, “but clearly a concern for the LGPS funds and pools in England and Wales is that the good work already done isn’t overlooked, and that avoidable additional costs are not incurred when considering changes to pools that may not be of the envisaged £50bn size, but which are clearly delivering for LGPS funds”. 

 

For private sector defined benefit schemes, the government will set out plans to introduce a permanent ‘superfund’ regulatory regime for DB consolidators that are not insurers but sever the links to a scheme’s sponsor. The regulator has been applying an interim regime so far because of parliamentary delays in producing superfunds legislation, but the government published its response to a 2018 consultation on Tuesday. 

 

The government will also encourage the establishment of new collective DC funds “which can invest more effectively by pooling assets”. TPR consulted on expanding CDC to multi-employer providers earlier this year and responded on Tuesday. 

 

The new compact of providers pledging to allocate 5% of savers’ money to private equity follows a similar proposal by the City of London Corporation earlier this year. The Compact document bears the logo of the City Corporation. 

 

The Lord Mayor of the City of London, Nicholas Lyons, who is on sabbatical from his role as chair of Phoenix Group, said: “I’m proud to have convened key industry players to make this commitment to unlock £50bn in capital by the end of the decade which will improve returns for pension savers and support firms to grow, stay and list in the UK.”   

 

Industry calls for careful reform 

 

The Pensions and Lifetime Savings Association stressed the importance of private sector independence, including when it comes to capital allocation, and said there was a potential “win, win, win” situation for members, pension funds and government. 

 

“It is important and very welcome that pension schemes’ ability to direct their own investment strategy in the best interests of their members has been protected," said Nigel Peaple, director of policy and advocacy. 

 

Peaple said that “this is a complex area, and it is easy to get the wrong outcomes, so the government is right to propose undertaking a public consultation on all the key issues over the next couple of months”. 

 

Putting into question the government’s ‘bigger is better’ mantra, he remarked on the proposed consolidation measures that “there is already a great deal of consolidation happening in the UK landscape”, including through auto-enrolment in DC, via asset pooling by the LGPS, and by closed DB schemes buying out, as well as through value for money tests. 

 

Peaple emphasised that there are things other than consolidation that the government can do to facilitate investment in the UK, for example amending the rules applying to the auto-enrolment market, introducing more flexibility in the TPR DB funding code for open DB schemes, and supporting the good governance of the LGPS scheme, or providing fiscal incentives, such as the Long-term Investment for Technology and Science initiative.  

 

“Perhaps of more importance than anything else is ensuring there is a pipeline of suitable investment assets – which is why we support a bigger role for the British Business Bank,” Peaple added. 

 

He also urged the government to speed up auto-enrolment reforms. “More money going into pensions is a key way of ensuring more money will be available in retirement,” he said. On Tuesday, the government published an impact analysis of reforms.

 

Yvonne Braun, director of policy, long-term savings, health and protection at the Association of British Insurers, said the ABI welcomed the government’s ambition and its focus on value over price, but also warned about rushing reforms. 

  

“Any market-shifting reforms, such as the proposals for collective DC, superfunds, and the Pension Protection Fund, must be thoroughly considered so that they put savers first and don’t undermine policies and markets that are working well,” she said. 

  

The chair of the Association of Professional Pension Trustees, Harus Rai, said the APPT agrees that trustees must have high levels of knowledge and experience but called for care in implementing reforms. 

  

“The APPT is supportive of further increasing the standards of trusteeship for DB and DC pension schemes, but we have to stress that what may appear to be simple steps, like ‘more consolidation’ or encouraging greater savings in illiquid, growth investments require very careful thought and policy actions to accommodate the diverse range of UK schemes,” Rai said. “A rushed approach could easily create new financial risks to members’ benefits which would undermine the UK’s growth agenda.” 

  

Illiquid assets have been integral to diversified DC pension schemes around the world, argued the new chief executive of arm’s length body Nest, Mark Fawcett.   

 

“It’s been a key driver behind Nest setting up our own private market mandates to ensure our members aren’t missing out. Nest will continue to increase our investment in unlisted equities, helping our 12m members benefit from the strong returns these types of deals can typically offer,” Fawcett said.   

 

The other standalone master trust in the Compact is Smart Pension, whose chair Ruston Smith said the fund is committed to securing better outcomes for long-term savers.    

 

“Giving UK savers access to higher net returns by investing in unlisted equities, including innovative, high-growth UK companies as part of a well diversified portfolio, will deliver these outcomes over time,” he added.   

 

Sir Nigel Wilson, the outgoing group chief executive of L&G, said the firm was pleased to support the Compact’s ambition: “Increasing investment in science, technology and infrastructure will support better returns for the tens of millions saving for their retirement, as well as stimulate much needed long-term growth for the UK economy."    

 

Phoenix Group’s chief investment officer Mike Eakins said only 9% of UK pension funds are currently invested in alternative assets, compared with 23% in other major pensions markets. Eakins said: “With the right regulatory environment, Phoenix Group could invest up to £40bn in sustainable and/or productive assets to support economic growth, levelling up and the climate change agenda, whilst also keeping policyholder protection at its core.” 

 

Chris Cummings, chief executive of the Investment Association, said the chancellor’s recognition of the central role of long-term investment was the foundation of successful policy.   
  
Pension investment and changes to the listings regime would support the UK’s growth, he added. 

 

“Achieving this new economic dynamism will require the government to bring together regulators, policymakers, and businesses, to create a forward-looking and internationally competitive investment framework, based on a stable, long term policy approach. This will also improve the gilt market, ensuring UK government debt remains attractive to domestic and international investors,” said Cummings, adding that delivering these outcomes would require “to strike the right balance between risk and reward and between protection and innovation”. 

 

   

   

         

Will members benefit from the Compact pledge?  

Harus Rai

Kim Nash

Dan Richards

Martin Willis

Simon Cohen

Chintan Gandhi

Michael Clark

Kate Smith

Joanne Donnelly

Ros Altmann

Rob Yuille

Nigel Peaple

Steve Simkins

Steven Taylor