UK Pension Funds Agree to Invest 5% in Domestic Private Assets
UK pension fund managers have agreed to invest at least 5% of their assets into UK private markets, marking a win for the Labour government that’s seeking to boost the economy by drawing billions of pounds into local startups and infrastructure projects.
Seventeen large pension providers are signing up to the voluntary commitment, which will see them invest at least 10% of defined-contribution default funds in private markets by the end of the decade, according to a statement on Tuesday. Within that allocation, at least 5% of the total will be going to UK private markets, “assuming a sufficient supply of suitable investible assets,” it said.
The new deal will “unlock billions for major infrastructure, clean energy, and exciting startups — delivering growth, boosting pension pots, and giving working people greater security in retirement,” Chancellor of the Exchequer Rachel Reeves said in the statement.
The agreement comes less than two years after the original Mansion House Accord, when 11 companies committed to invest 5% of pension assets in unlisted equities, though a proposal for a specific UK allocation was dropped.
The new requirement to buy British assets was again contentious. Scottish Widows, the pension arm of Lloyds Banking Group Plc, isn’t a signatory to the new accord, reflecting its wariness that such a mandate would impinge on its ability to maximize returns, according to the Telegraph.
The fresh accord is set to unlock £50 billion ($66 billion) of investment for UK businesses and major infrastructure projects, and assets within its scope currently amount to £252 billion, according to the statement.
The Labour government, which came to power in July 2024, has been trying to deliver on its pledge to boost private investment and economic growth, and measures include a raft of reforms to the country’s fragmented pension system. Policymakers have so far shied away from mandating pension funds to invest in UK assets. Such a move would face a backlash, given funds are bound by fiduciary duties that require them to act in the best interests of their customers.
Speaking in an interview to Bloomberg Television on Tuesday, Reeves said she didn’t rule out mandating pension funds to allocate money to UK assets, but added it wasn’t needed.
“I’m never going to say never,” she said when asked if she was considering such a move. “But I don’t think it’s necessary. We don’t need to mandate them if people are willing to sign a voluntary accord.”
Whether pension funds end up channeling more into domestic investments will also depend on their attractiveness. The Pensions and Lifetime Savings Association, a trade body, has pointed to the government’s industrial strategy and planning reform as critical for ensuring a pipeline of investable assets.
In the new accord, shares that are listed on the London Stock Exchange’s AIM market as well as the Aquis Growth Market also count toward the UK private-markets allocation target. The exchanges “play a critical role in supporting high-growth companies that drive innovation, jobs and productivity,” said Alastair King, Lord Mayor of London, who helped organize the pact.
Pension providers that signed up to the new Accord:
- Aegon, Aon, Aviva, Legal & General, LifeSight, M&G, Mercer, NatWest Cushon, Nest, NOW: Pensions, Phoenix Group, Royal London, Smart Pension, the People’s Pension, SEI, TPT Retirement Solutions, and the Universities Superannuation Scheme
This caught my attention for a few reasons.
First, the UK is looking to reform its pension system and model it after the Maple Eight (easier said than done unless they get the governance right).
Second, there has been a concerted effort to push Canada's large pension funds to invest more domestically so it's interesting to see what the UK is doing.
Former Bank of Canada Governor Stephen Poloz was tapped to examine how Canada's pension funds can invest more domestically and back in February, he discussed the path for Canadian pension funds to own domestic airports and adjacent assets at the Canadian Club Toronto.
Now, there is no mandate or voluntary push to have Canada's large pension funds invest more in domestic assets -- public or private -- but today newly elected Prime Minister Mark Carney unveiled his new cabinet and among his new ministers was Timothy Hodgson who will assume the role of Minister of Energy and Natural Resources.
Mr. Hodgson is a heavyweight who formerly ran Goldman Sachs Canada and also sat on the boards of PSP Investments and most recently at Ontario Teachers' Pension Plan.
This Bloomberg article calls him the "bulldog"ex-Goldman banker called upon to fix Canada's resource sector but he's a lot more than just a former banker.
He has tremendous experience and having served on the boards of two major Canadian pension funds, among other boards he has served on, he knows what is at stake and how we need to expand our traditional and renewable energy as we forge a path of energy independence.
He also understands the climate crisis, ESG and why responsible investing is critically important.
Some think he will butt heads with Alberta's Premier Danielle Smith, I think quite the opposite, he will listen carefully to their concerns and propose policies that benefit the country as a whole.
I think the same thing about Mark Carney, he wants to get things done and knows the country is very divided so some compromises are necessary.
Back to the UK proposal, Gregg McClymont penned a comment for Professional Pensions noting that urging pension funds to act more patriotically has become politically plausible:
News that the forthcoming Pensions Bill will include a backstop "direction of investment" power marks a significant escalation in the government's campaign to deliver more domestic investment.
The existence of this backstop power has somewhat overshadowed the signing of Mansion House II by 17 funds and providers this morning (13 May), with its pledge to a 5% allocation to UK private markets (including infrastructure) by 2030. But of course, they are intimately connected – the former being the means by which government maintains pressure on schemes to deliver the Mansion House Accord.
How did we get here? A decade ago, the notion of politicians directing pension fund investment decisions would have been fanciful. Even as George Osborne set about after the 2015 election to scale up the Local Government Pension Scheme (LGPS), the focus was on reducing investments costs rather than on increasing domestic investment.
On the other hand, the potential for a connection was there in theory at least: the same chancellor had previously set out a plan for ‘£20bn in UK pension fund investment in infrastructure', an initiative which encouraged the creation of the now defunct Pensions Infrastructure Platform (PIP), which was owned by, and invested on behalf of, five UK schemes.
As in so many other policy areas, Brexit has a role to play, because it exacerbated existing UK economic weakness, significantly depressing GDP according to all reasonable estimates.
More specifically with Brexit, UK access to the European Investment Bank (EIB) and the European Bank of Reconstruction and Development (EBRD) ended – these institutions were a significant source of infrastructure project structuring expertise and the EIB's case a significant source of finance too (c.€5bn per annum in the UK's case), which has not been adequately replaced.
After 2016, as the UK's productivity failures became starkly apparent, the search for growth solutions intensified. If persistently low levels of investment both public and private had long been identified as a weakness in the UK economy, a specific problem was identified by policy makers with respect to domestic investment in ‘high growth', that is, potentially high growth, companies often located in the bio sciences and digital technology sectors.
The argument here is and was simple: too much of the value created by new UK companies is captured by US investors in particular who, deploying the scale and expertise of its venture capital sector, buy up these enterprises. If, and when, they succeed, the rewards often end up in the US (and usually the companies too).
But it is also an argument in tune with the backlash against the ideology of globalisation which until recently was the UK's governing orthodoxy, set out most bluntly by Tony Blair twenty years ago now: "I hear people say we have to stop and debate globalisation… You might as well debate whether autumn should follow summer".
Free markets were the corollary of globalisation – economic actors should pursue their own objectives and in doing so all would benefit, in aggregate. With Trump's first victory and Brexit, both in 2016, these assumptions for the first time since the 1970s faced significant challenge from new forms of nationalism which focused on the distributional consequences of what was often known as "the Washington consensus".
The international experience
Pension funds have increasingly been caught in these currents, their duty to prioritise members financial interests having led to a globally diversified asset allocation. This becomes obvious when one looks beyond the UK's shores to the systems which the current government has cited as the major inspiration for its proposed LGPS and defined contribution (DC) reforms, respectively.
In Australia, the undoubted success of superannuation in creating a large pool of capital for investment, and, in particular, its significant domestic bias in public and private market allocations – a product of tax incentives and the privatisation of local infrastructure at the very moment the super funds were on the hunt for these assets – has not prevented politicians from demanding more domestic investment.
Such calls have come especially to solve Australian's housing supply crisis, whether via pension funds financing new construction, or pension members being able to access their pot to raise mortgage finance. The Australians call it "Nation Building" with the Treasurer (equivalent of UK Chancellor) hosting a series of summits with funds to discuss how to finance national priorities.
In Canada, the pressure on the Maple 8 funds has been – rhetorically, at least – even greater, reflecting the fact that their domestic allocations at around 20% are lower than the Australians at around 35%.
The Maple 8 pioneered a global public and private markets approach to pension funds, this, as well as the fact that Canadian infrastructure is largely owned by provincial governments rather than by the private sector, explains their relatively lower domestic bias versus Australia.
While this might be prudent as a matter of strategic asset allocation, it has led to increasing criticism from within Canada, where stretched public budgets struggle to finance new infrastructure at the required scale, and where the Canadian stock market is seen to require greater domestic financing (not least in the light of curbs on Chinese investment).
This of course is also the case in the UK, where the practical requirement of ministers looking to the immediate future is to find domestic sources of savings for capital investment across the economy public and private, and ranging growth equity through to infrastructure. Furthermore, the domestic bias in UK pension fund allocations is on average less than in Australia or Canada, because of the huge role that global indexed equities have played in the average default fund and also (versus the Australians at least) because of the modest domestic infrastructure allocations by UK funds.
But the wider context in which urging pension funds to act patriotically has become politically plausible – across parties – is the drift away from free market globalisation as a dominant idea. The Great Financial Crash and the subsequent fiscal crises, Trump, migration crises, and Brexit have one way or another, all contributed to this developing perspective, in the UK and elsewhere.
In taking a backstop power to direct investment, the UK government has done something all but unthinkable just a decade ago.
A lot of good arguments here but I do caution, pension funds cannot be the answer to rectify fiscal profligacy and out of control spending.
Importantly, pensions are there to serve their members, full stop. If they can do both, serve members and bolster economic activity (like CDPQ which has a dual mandate), so much the better but the focus must always be on the best interests of members.
In some cases, like the $9 billion surplus at the federal Public Service pension plan, it makes sense to discuss creating a new Canada Growth Fund to invest more domestically (see former PSP CEO Neil Cunningham's thoughts here).
Below, Chancellor of the Exchequer Rachel Reeves said she didn’t rule out mandating pension funds to allocate money to UK assets, as the government seeks to channel more investment into the domestic economy.
Comments
Post a Comment