Nine of the UK’s largest defined contribution (DC) pension providers have voluntarily pledged to allocate 5 per cent of assets in their default funds to unlisted equities by 2030, as part of a new agreement, the Mansion House Compact.

The Mansion House Compact members are: Aviva, Scottish Widows, L&G, Aegon, Phoenix, Nest, Smart Pension, M&G and Mercer.

The Compact, a non-legally binding initiative, is inteded to show a provider's intent to take meaningful action to achieve better outcomes for UK long-term savers by facilitating access to the higher net returns that can arise from investment in unlisted equities as part of a diversified portfolio.

The initiative was announced as part of Chancellor, Jeremy Hunt’s, first Mansion House speech, which included a wide-ranging package of reforms designed to boost pensions and increase investment in British businesses, with estimates that the reforms could increase a typical earner’s pension pot by 12 per cent over the course of a career.

To ensure that the money unlocked by these reforms is invested quickly and effectively, the Chancellor also confirmed that he asked the British Business Bank to explore the case for government to play a greater role in establishing investment vehicles, drawing upon the BBB’s skills and expertise.

This is expected to complement the £250m of support that government made available through the Long-term Investment for Technology and Science (LIFTS) initiative to incentivise new industry-led investment vehicles.

In addition to this, Hunt said that he will encourage the establishment of new collective defined contribution (CDC) schemes that can invest more effectively by pooling assets, also launching a call for evidence to explore how we can support pension trustees to improve their skills, overcome cultural barriers and realise the best outcomes for their pension schemes and subsequently their members.

This was in addition to specific measures for the LGPS and the defined benefit (DB) space, with a call for evidence on the possible role of the Pension Protection Fund and the part DB schemes could play in productive investment to be launched tomorrow (11 July).

Commenting on the plans, Hunt stated: “British pensioners should benefit from British business success. By unlocking investment, we will boost retirement income by over £1,000 a year for typical earner over the course of their career.

“This also means more investment in our most promising companies, driving growth in the UK.”

Adding to this, Aegon UK chief investment officer, Tim Orton, suggested that the Compact will create “opportunities that help deliver £500m assets under management target set for investments in climate solutions within its default funds by 2026 and as we progress towards net zero.”

“Trustees and managers of DC schemes are under a duty to act in the best interests of their scheme members," he continued. "As part of this, they should consider a wide range of investments, including private equity, for the benefit of the members. This is particularly true of scheme default funds where most members remain invested, leaving investment decisions to the trustees or manager."

M&G chair, Edward Braham, also stressed the potential benefits, suggesting that “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”.

“M&G’s heritage is in investing in private markets, whether it is through infrastructure, real estate or innovative companies with purpose,” he continued.

“We are democratising access to private markets through the Prudential With Profits Fund, and are supportive of DC pension reforms that encourage more investment of this kind that has potential to result in positive outcomes for savers.”

As part of the agreement, Nest Invest CEO, Mark Fawcett, confirmed that Nest will also continue to increase its investment in unlisted equities, “helping our 12 million members benefit from the strong returns these types of deals can typically offer.”

“For many years now, illiquid assets have been integral to diversified DC pension schemes around the world,” he said. It’s been a key driver behind Nest setting up our own private market mandates to ensure our members aren’t missing out.”

Scottish Widows CEO, Chirantan Barua, also emphasised the need for the industry “modernise the investment options available to customers”, arguing that “with the right consumer protections in place, the proposals announced today could make a huge difference to our customers and the wider UK economy”.

Smart Pension chair, Ruston Smith, added: “Smart Pension is committed to securing better outcomes for long-term savers. Giving UK savers access to higher net returns by investing in unlisted equities, including innovative high-growth UK companies, as part of a well-diversified portfolio, will deliver these outcomes over time.

“We are pleased to be a signatory of the Mansion House Compact and, as a successful British fintech, we are proud to be supporting the country’s technology sector, helping home-grown startups and scaleups to flourish and thrive.”

Also commenting on the launch, L&G group CEO, Sir Nigel Wilson, said: “As the UK’s largest manager of money for pension clients, L&G is pleased to support the ambition set by the Compact.

“Increasing investment in science, technology and infrastructure will support better returns for the tens of millions saving for their retirement, as well as stimulate much needed long-term growth for the UK economy."

Mercer investments and retirement leader, Phil Parkinson, added: “Mercer supports proposals that lead to improved pension scheme member outcomes. As a global investment solutions provider, we see first-hand the value that illiquid asset allocations can bring to investors’ portfolios from a risk and a return perspective and are in favour of initiatives designed to unlock this asset class for DC members.”

Additionally, Phoenix Group chief investment officer, Mike Eakins, commented: “We are proud to sign the Compact, which is an important step to allow UK long-term savers to invest in a more diversified portfolio, giving them access to the potential returns of a broader range of assets, in line with their international counterparts.

“Currently, only 9 per cent of UK pension funds are invested in alternative assets as compared to 23 per cent in other major pensions markets.

"With the right regulatory environment, Phoenix Group could invest up to £40bn in sustainable and/or productive assets to support economic growth, levelling up and the climate change agenda whilst also keeping policyholder protection at its core.”

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