Slow progress in allocating UK pension assets to domestic unlisted assets could see the government increase providers’ voluntary investment targets to 10 per cent of total portfolios.
Chancellor Rachel Reeves is set to unveil Mansion House Compact II next week which sets new investment targets for the nation’s largest defined contribution (DC) pension providers, including increases in allocations to private markets from 5 per cent to 10 per cent.
The more aggressive objectives are a result of slow progress in investment to unlisted equities following the original 2023 Compact which set voluntary, non-binding agreements between nine of the UK’s largest DC pension providers to allocate five per cent of assets in their default funds to unlisted equities by 2030.
Signatories included Aviva, Scottish Widows, Legal & General, Aegon, Phoenix, Nest, Smart Pension, M&G and Mercer.
However, according to law firm Norton Rose Fulbright, while many of the initial signatories are understood to have taken key steps progressing their Mansion House Compact commitments, “only limited assets have so far been invested”.
According to the Association of British Insurers (ABI) as of February 2024, compact signatories held nearly GBP800 million of unlisted equities in their DC default funds, equivalent to just 0.36 per cent of their DC default fund total of GBP219 billion.
The ABI says “more investment in unlisted equity has been committed and is expected to grow”, but notes “there are key operational and technical barriers to investment in private assets, which have been identified by individual signatories”.
One provider told the ABI that Long Term Asset Funds – the vehicles designed to designed to provide easier, simpler access for DC investors to long-term private markets investments – “remain expensive, have a lengthy approval process and are cumbersome”.
Providers also complained that performance fees are a challenge, noting that “certain fee models commonly used in private capital markets may be financially unfeasible”.
The government has so far resisted mandatory investment in UK unlisted assets, but speculation remains that the ongoing pensions review could lead to legislation forcing allocations to domestic private markets.
Mark Searle, Head of DC Investment at XPS Group, says: “There’s speculation that Mansion House II may soon increase DC asset allocations to private markets from 5 per cent to 10 per cent, with half directed towards UK investments. Reports go further to suggest the government might mandate UK allocations if domestic investment lags behind global benchmarks. While we have strong reservations about mandating investment choices and the potential impact on UK savers, capacity constraints – with is often cited as a concern – this shouldn’t deter DC schemes.”
He continues: “A significant pool of illiquid assets is becoming available as DB schemes approach buyout, presenting a valuable opportunity for DC savers. Now is an exciting time to review asset allocations and enhance member outcomes by timing the purchase of illiquid assets to deliver real value.”
