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It is now a little over a year since the then Chancellor of the Exchequer, Jeremy Hunt delivered a speech at Mansion House which birthed the Mansion House reforms for pension schemes. What are those reforms, where are we now with them, and how do they relate to UK private equity?
The key aspect of the Mansion House reforms for the private equity sector is an agreed objective for the largest UK DC asset managers to invest at least 5% in private equity by 2030 with consultations to explore BD pension schemes following suit, with a clear focus on consolidation across the pensions industry.
The proposed reforms are wide in scope and whilst they differ in approach for DB and DB schemes, one common theme is the need for scale in order for pension schemes to be able to take advantage of a wider range of investment opportunities.
Defined contribution schemes are now being asked to invest in private equity. It is acknowledged that whilst this measure could increase returns, it is equally important to recognise that investment in private equity is not risk free.
The creation of the "Mansion House Compact" is an agreement between the largest DC funds in the UK to allocate at least 5% of their default funds to unlisted entities by 2030, unlocking an additional £50 billion of additional investment. Whilst this isn't limited to UK private equities, this is expected to form a large proportion of it. The Mansion House Compact, which was reinforced in this year's Kings Speech, will be guided by three golden rules:
Firstly, seeking to secure the best possible outcome for pension savers;
Secondly, to prioritise a strong and diversified guilt market to deliver an evolutionary rather than revolutionary change in the pensions market; and
Thirdly, to strengthen the UK’s position as a leading financial centre to create wealth and fund public services.
In addition to the drive on equity investments, the reforms also covered:
Heavy weight venture capital investor, the British Business Bank, was asked to explore avenues for itself and the Government to play a greater role in establishing efficient and effective investment vehicles to capitalise on the resources unlocked by the reforms.
A consultation was held on a proposed statutory regime for certain pension schemes to be authorised to as default consolidators for deferred small DC pot.
CDCs are funded by fixed-rate contributions from employers and members but can provide members with target benefit income streams that are somewhat similar to DB provisions and have the flexibility to reduce benefits in response to reduced funding levels. Whilst these have been available since August 2022 for single or connected employers, plans to expand this for use by multiple unrelated employers look likely to go ahead, opening the way for them to be used as industry-wide arrangements or to be provided commercially through master trusts. The Pensions Regulator is expected to issue multi-employer authorisation guidelines towards to the end of 2024.
This is essentially the process of converting pension savings into retirement income. The aim here is to establish a broad alignment of services from different providers offering every pension scheme a range of decumulation solutions for its scheme members. The proposal includes a duty on pension scheme trustees to consider the needs of their members when they wish to access their pension pot and provide options to meet those needs.
With a continued focus on consolidation, the defined benefit proposals under the Mansion House Reforms include:
These are occupational pension schemes which are set up to provide an alternative to insurance buy-outs. They are able to receive transfers in of assets and liabilities from occupational DB schemes, discharging the transferring trustees and the sponsoring employer from their liabilities. This is seen as a way of encouraging the consolidation of DB schemes which will then be able to take advantage of the investment opportunities that brings.
The planned reforms seek to accelerate the consolidation of the various Local Government Pension Scheme funds which account for approximately £364 billion of assets through increased use of asset pooling as well as a proposal to double LGPS funds investment in private equity from just under 5% of assets to 10%. LGPS have a history of innovation in the private market space and have been heavier users of this asset class compared to private sector DB schemes.
This is a project that has been looking at the factors which may be deterring DB schemes from investing in growth assets. This is being undertaken in anticipation of a clear mandate to increasing equity allocations within DB investment. This could well be alongside the creation of a public sector consolidator.
This is the tagline being linked with this reforms with the two key underlying themes being increasing investment in the UK and increasing efficiency in the pension sector. This was a conservative initiative, so where has labour taken things?
Over the summer this year, the labour government launched the first stage of its review into pensions as it focussed on generating more investment from the £800 billion defined contribution pension sector into the UK economy. The LGPS remained a target for the labour government with the review looking into ways to unlock its investment potential whilst also tackling its spend on fees and costs.
Labour echoed the intentions set out in the conversatives' Mansion House Reforms in aiming to make the UK pensions sector, worth £2.4 trillion across all types of pension schemes, a driver of investment in the UK.
"The review we are announcing is the latest in a big bang of reforms to unlock growth, boost investment and deliver savings for pensioners," said Chancellor Rachel Reeves. "There is no time to waste. That is why I am determined to fix the foundations of our economy so we can rebuild Britain and improve people's lives."
On 31 July 2024, the Association of British Insurers (ABI) found that the pension companies who signed up the Mansion House Compact, to allocate a minimum of 5% of DC funds to unlisted equities by 2030 have laid "strong foundations" in line with that target.
The ABI said that the 11 signatories to the Mansion House Compact, which includes Aegon, Aviva and Scottish Widows had nearly £800m of unlisted equity assets in the DC funds in February 2024. This is equivalent to 0.36% of the total value of their DC funds (£219bn). The other signatories to the Compact are Legal & General, M&G, Natwest Cushon, Aon, NEST, Phoenix, Mercer and Smart Pension.
The pension funds reported having taken key enabling steps to prepare themselves for progress towards the target. These included hiring, training and new partnerships. Most had also started developing specific solutions to enable increased unlisted equity investment such as Long-term Asset Funds (LTAFs). As an example, Legal & General over the summer launched a fund for DC savers specifically to give them the opportunity to access private market exposure. It has already integrated this fund into its default options across its Master Trust and GPP provision. Aegon is planning to introduce private market investment into its largest workplace default fund this quarter.
The majority of the 11 reported positive support for the ambitious target from those who make investment decisions, however they also highlighted the barriers to implementing the Compact, reporting the focus of benefit consultants and trustees on price rather than value when it came to scheme selection. To address this, the signatories and the ABI are suggesting a shift in culture towards value as a key policy intervention.
The full ABI progress update which was produced in partnership with the City of London Corporation can be read here.
The Phoenix Group, who are the UK's largest long-term savings and retirement business and have over 12 million customers and more than £280 billion of assets under management, have last month announced a joint venture with Schroders to invest as much as £20 billion of pension money into private markets over the next decade in line with the wider industry commitment to direct retirement savings capital towards boosting the UK economy.
Peter Harrison, group CEO at Schroders said, "The UK's private companies are an untapped universe of investment opportunity. By stimulating investment into our private markets, our partnership will address the multiple challenges of the looming retirement benefit crisis and boosting UK growth."
Andy Briggs, group CEO at Phoenix Group added, "It will help up to deliver our goal of giving UK long-term savers a way to invest in a more diversified portfolio with the potential for higher returns, from a broader range of assets."
Aviva has also launched a dedicated venture capital arm this month as part of a wider project to restructure it's private market arm which currently manages of £40 billion in assets, mainly focussing on equity and debt strategies in real estate and infrastructure.
In early September Nausicaa Delfas, Chief Executive of the Pensions Regulator (TPR) gave a speech at the British Private Equity and Venture Capital Association (BCVA) UK Pensions Summit entitled: 'Transparency in investment performance can truly deliver for savers'.
According to TPR, the forthcoming Pensions Bill and the government’s two-part pensions review presents a unique opportunity to look at how it can make the pensions system work for everyone. TPR believes sound investment in diverse assets can not only improve outcomes for savers but could also generate growth for the UK economy.
TPR plans to bring greater transparency around performance and costs as part of the forthcoming value for money reforms to help bring about meaningful, positive changes in investment strategies. To help make this happy, it has doubled its number of investment consultants and overhauled its structure to become more market-facing and outcome-focused.
TPR also expects trustees to share proper risk management controls and a genuine understanding of what the right balance of risk and reward is for their type of member, and their type of scheme. TPR wants a clearly defined objective for savers within a scheme, which trustees regularly review. They should understand the likelihood of achieving those objectives, comparing their real-world performance with their forecasted models and adjusting strategy accordingly. TPR will probe trustees where it finds over-investing in low-risk, low return assets, especially as it believes that properly considered 'productive finance' (including private and venture capital investments) have a role to play in a diversified portfolio.
To find out more about more pension schemes and private equity investment, get in touch with [private equity team contact] or Céline Mather-Franks (Pensions team)
Please note: Nothing in this article constitutes investment advice.
To find out more about more pension schemes and private equity investment, get in touch with Céline Mather-Franks or Claire Holland.
