Some of the UK’s largest defined contribution pension schemes have agreed to commit 5 per cent of their default funds to unlisted equities by 2030.
Aviva, Scottish Widows, L&G, Aegon, Phoenix, Nest, Smart Pension, M&G and Mercer have all signed the ‘Mansion House Compact’, which was announced by the chancellor in his Mansion House speech last night (July 10).
The signatories represent two-third of the UK’s DC pensions market, and the agreement could represent up to £50bn in investment into high growth companies, if the rest of the market follows.
DC pension schemes in the UK currently invest under 1 per cent in unlisted companies.
In his speech, chancellor Jeremy Hunt said his aim is to enable the UK’s financial services sector to increase returns for pensioners, improve outcomes for investors and unlock capital for UK growth businesses.
He said the £2.5tn pensions market in the UK has been strengthened by policies such as auto-enrolment, but there is currently a “perverse situation” in which UK institutional investors are not investing as much in UK high-growth companies as their international counterparts.
“At the same time on their current trajectory, some defined contribution schemes may not provide the returns their pension fund holders expect or need,” he said.
Edward Braham, chair of M&G, said: “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.”
The news was widely welcomed from the pensions sector.
Nausicaa Delfas, chief executive of The Pensions Regulator, said the reforms support its ambition for pension savers to be in large, well-run schemes that deliver good outcomes at every stage.
“They will drive a long-term focus on value, encouraging schemes to invest in the full range of asset classes to deliver higher returns for savers,” she said.
Stephen Budge, partner at LCP, said members of DC pension schemes “rightly” deserve the best investment strategy to maximise the potential value of their savings at retirement.
“So its great to see initiatives such as this challenging trustees and industry on supporting access to potential return drivers outside of the traditional asset classes, ones which can deliver meaningful change for members and which are much more commonly accessed in DB pension schemes and DC schemes in other countries.”
Tom Selby, head of retirement policy at AJ Bell, said 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,” he said.
Selby added that it is vital that the interests of savers are paramount in the development of these proposals.
“DB and DC pensions are very different beasts and need to be treated as such, so it is positive the government hasn’t gone down the road of forcing pension schemes to allocate their funds in a certain way.
“It is also sensible to keep these reforms away from the retail investment world, where illiquid investments are more likely to be problematic.”
Hunt said the government will also launch a call for evidence this week on the role of the pensions protection fund and the part defined benefit pension schemes play in productive investment.
In addition, the government will look at the culture of investment decisions and improve the understanding of pension trustees’ fiduciary duty across DC and DB pension schemes, through a call for evidence launched jointly between the Treasury and the Department for Work and Pensions.
sally.hickey@ft.com
