The UK government looks like it is teetering close to telling pension funds where they must allocate billions of pounds. This threatens a dangerous precedent that the UK pension industry must do all it can to prevent.
On Tuesday, 17 of the UK’s biggest pension funds signed up to a voluntary agreement devised by the government, dubbed the Mansion House Accord, to invest at least 10% of their defined contribution assets in private markets by the end of 2030.
Of this money, half must be invested in the UK, which the government reckons will "unlock" up to £50bn of investment in private assets, including £25bn in the UK, by 2030.
This is not a new idea by the Labour Party. The long-running Conservative government first introduced a similar idea in 2023, when 11 pension funds agreed to invest up to 5% of their money in unlisted companies.
As a standalone concept, this feels contrary to a pension fund’s fiduciary duty — the legal obligation to work in the best interests of clients, in this case pension savers.
The 17 funds have said they will only invest according to fiduciary duty and to the Financial Conduct Authority’s Consumer Duty towards their retail customers.
Nonetheless, pledging to put a certain amount into a specific asset class, even if that promise is not legally binding, means a pension fund is, by definition, constrained from searching for the best asset or geographical region in which to invest.
Private risks in public pensions
It gets even murkier when the government is promoting private assets, which are inherently less transparent than public markets, meaning risks may go undetected.
Between January 2022 and August 2023, for example, private equity-backed firms had a default rate of 17%, according to Moody’s — almost double the rate at public firms.
Pension funds do already invest in private markets, of course. But badgering them to invest more opens up the possibility of funds being pressured into being overweight in an illiquid asset class that has far less data available than public markets.
They could end up investing billions of pounds in riskier products that are not necessarily the best fit for their end investors.
This comes at a time when the UK’s Department for Work and Pensions estimates that 38% of working age people are not saving enough for retirement. That will only be made worse if their pension pots are forced to invest in sub-optimal assets.
Astronomical returns promised
The government says the total defined contribution assets managed by these 17 firms are £252bn, which could rise to £740bn by 2030.
The Mansion House Accord is billed as voluntary, but Reeves has refused to rule out compulsion if pension funds fail to invest enough in the assets the government favours, the Financial Times reported.
Forced to invest
The UK Treasury said on Tuesday that “progress against the commitment will be monitored and the initiative will be reinforced by measures to be announced in the upcoming final report of the Pensions Investment Review”.
This is the government’s study of the UK pension industry, with an eye to consolidating it into a handful of mega-providers, as in Canada and Australia.
The UK needs investment, and the government is right to explore options.
But pension funds must fight the UK government trying to mandate how they allocate funds.
It is inexcusable for any government to convince itself it has the right to force pension savers to put their money anywhere, and for a developed, democratic government to threaten it is bordering on obscene.
With around £3.5tr in assets under management, UK pension funds have the power.
Let’s hope they don’t forget it, and they slap down the idea of government ordering where pension investments go before an absurd precedent is set.