How will chancellor’s Mansion House plans impact pension providers?

Chancellor Jeremy Hunt announced in his annual Mansion House speech that nine pension providers have signed up to a voluntary “compact”, whereby they agree to have a 5 per cent allocation to those assets as the default. That could equate to around £75bn of assets. 

The assets include both unlisted early-stage companies and private equity-type strategies. 

But while he broadly welcomes the initiative, AJ Bell head of retirement policy Tom Selby says: “The chancellor is clearly desperate to boost long-term growth in the UK but has no appetite to do so through increased government borrowing. Given that context, it is understandable Jeremy Hunt has his eyes firmly set on directing a chunk of the UK’s £2.5tn pensions war chest into the UK economy. 

‘Handful of salt’

Hunt said the reforms will also boost the returns of individuals in defined benefit pension schemes by 12 per cent over their lifetimes, and provide £1,000 of extra income in retirement, on the basis that the returns from these assets should be higher than the alternatives. 

That figure is based on an individual beginning to save into a pension at the age of 18, and continuing to contribute until retirement without a break. 

Selby says that while the returns may be higher, “there are absolutely no guarantees”, and that such precise figures should be taken with a “handful of salt”. 

Sir Vince Cable, the former secretary of state for business and current holder of economics posts at the London School of Economics and the University of Nottingham, says he is “surprised this hasn’t been announced sooner. It’s important that the savers understand the extra risk they are exposed to”.

The chancellor is clearly desperate to boost long-term growth in the UK but has no appetite to do so through increased government borrowing Tom Selby, AJ Bell

He continues: “But I would also say that, based on my experience in government when we launched a couple of initiatives such as the British Growth fund and the British Business Bank to raise capital for early-stage businesses, it takes years to gain any traction.

“Indeed, those institutions still don’t really manage very large sums today. So I don’t think this will make much difference in the next year or two, but I welcome any initiative which helps deepen the pools of capital available in the UK.

“It has always struck me as odd that many of the Canadian, American and Australian pension funds actually own these type of assets in the UK, but UK pension funds are not permitted to.”

Both Selby and Cable also say they welcome the fact that this initiative is voluntary, and so pension providers will never be forced by the government to allocate capital this way. 

Jupiter UK equity fund manager Chris Smith says the chancellor’s proposals leave many questions unanswered.

“As a UK fund manager with significant investments in UK plc, it goes without saying that we are extremely keen to see the UK’s entrepreneurs, economy and its corporations thrive globally,” Smith says.

“That said, it is unrealistic to expect the reforms announced to make a meaningful difference to growth or investment in the UK in the short term and there are still a lot of questions to answer. How are ‘UK growth assets’ defined? What does a ‘voluntary expression of intent’ mean? What will be the liquidity, valuation, cost differences and implications to pension fund members being asked to invest in unlisted assets?

"Is there enough in the way of high-quality, unlisted investment opportunities in the UK for an additional £75bn of investment? What evidence suggests that unlisted assets will deliver higher, risk-adjusted, after-fee returns and therefore justifies a higher allocation in pension portfolios?” 

Any calculation around the long-term average returns that can be achieved by any asset class, including private equity funds, may be skewed by the past decade of mostly very low interest rates, which boosted all asset classes but was acutely helpful for private equity investors. This is because these funds usually used some debt to make investments, and the cost of debt fell dramatically in the decade after the global financial crisis, which may have skewed the long-term average of returns and so they could be lower in future. 

It is unrealistic to expect the reforms announced to make a meaningful difference to growth or investment in the UK in the short term and there are still a lot of questions to answer Chris Smith, Jupiter

The nine pension investment providers that have made the 5 per cent commitment have promised to hit that target by 2030, and they can only operate within the parameters set for them by the trustees of the pension funds.

The 2030 target only applies to default funds — that is, the portfolios of those clients who have not actively chosen the funds themselves. 

Sir Steve Webb, a former pensions minister and currently a partner at LCP, says this makes the 5 per cent threshold announced an “aspiration.”

He tells FTAdviser: “The nine firms won’t have made this commitment without already having had agreement from the trustees and others, but of course the commitment is to do this by 2030 and a lot can change in that time.

"If they don’t see assets worth investing in by that time, they won’t allocate the 5 per cent to there. It’s never been the case that they were completely banned from investing in this way, but the regulatory regime that was in place meant many chose to not do it. That is what has changed now.” 

In terms of what may be in it for the asset managers, one of the companies that signed the chancellor’s compact is M&G. 

Edward Braham, M&G chair, says: “Patient capital put to work in companies or projects over multiple decades is essential to support economic growth and, importantly, capture value for people’s pensions as they save for their retirement. M&G’s heritage is in investing in private markets, whether it is through infrastructure, real estate or innovative companies with purpose.” 

Among the other companies to have signed the compact are Aviva and Scottish Widows.   

David Thorpe is investment editor at FTAdviser