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A UK government push to unlock £50bn in capital from the country’s biggest pension funds is running into roadblocks as retirement funds balk at shifting savers’ investments into costlier and riskier assets.
Pension funds have been seeking to align with the UK’s ambition to fuel economic growth through pension fund finance dubbed the “Mansion House” reforms announced in July.
The voluntary “Mansion House” compact signed by nine pension funds, with about £400bn in combined assets, aims to invest at least 5 per cent of members’ “default” funds into unlisted assets, such as private equity, or early-stage companies by 2030.
But some signatories said they had encountered challenges as they seek to implement the agreement that requires investment in higher-cost assets.
Aviva, one of the UK’s largest pension providers, said one important issue was the question of how to introduce unlisted, also known as “illiquid” assets — which are typically more expensive than public assets — to existing “default” funds used by millions of savers.
“This is a problem because it is really hard once you have got someone set up with a scheme to then increase charges,” said Emma Douglas, head of workplace pension savings with Aviva. “It is still early days in terms of how we are going to do this [Mansion House compact]”.
Laura Myers, partner with LCP, the actuarial consultants, said that higher fees were an obstacle for the market as it sought to meet the Mansion House pact target.
“The concerns we are hearing [from pension funds] are that if we put this illiquid asset in our default strategy, our default will be more expensive for members,” said Myers.
“They are quite concerned that if they do go ahead with illiquids, and they are one of the first movers, then they could potentially not win business.”
Pension funds are also concerned about investing in riskier assets such as venture capital that the government is keen to see supported as part of its ambition for the UK to become a science superpower.
Speaking at an industry conference last month, Liz Fernando, chief investment officer of Nest, the government-backed workplace pension fund, said the fund would not go into early-stage VC as it preferred proven business models.
Standard Life, which is part of the Mansion House agreement via the Phoenix Group, its £270bn parent, has said it is keen to explore new investment opportunities for retirement savers but is clear on its investment drivers.
“We reserve the right to invest in venture as part of a wider private equity allocation, only if we think it is in the best interests of members,” said Callum Stewart of Standard Life.
Recent government flip-flopping over its flagship rail project HS2 and a softening of the net zero ambitions has created uncertainty among some pension funds looking to invest in UK growth.
“The only way to make pension funds really go for this [to invest in the UK] is [for government] to make some sort of first-loss provision or additional incentive to say this is why we are going to share some of the pain on this if it doesn’t work out,” said John Chilman, chief executive of Railpen, which invests about £34bn in assets for the 350,000 members of the railways pension scheme.
The Treasury said UK pension funds invested less in high-growth companies than international comparators.
“The Mansion House compact encourages 5 per cent investment in unlisted equities, which has the potential to increase returns for pension savers in the long run, as well as unlocking an additional £75bn of financing for growth,” it said.
“Well-designed performance fees are excluded from the scope of the pension fee charge cap and we are ensuring pension funds have the right vehicles available.”