Productive investment: providers aim high in Mansion House Accord

Following protracted discussions, 17 major pension schemes and providers have put their names to a new Mansion House Accord. Signatories aim to invest at least 10% of default fund assets in private markets by 2030, with at least 5% of the total to be invested within the UK.

Background

The Accord builds on foundations laid by the July 2023 Mansion House Compact. Under the Compact, 11 signatories aimed to allocate at least 5% of default fund assets to unlisted equities by 2030.

An update on the Compact, published last year by the ABI, reported "progress despite barriers". About 0.36% of signatories' relevant assets, with a value of £793m, were invested in unlisted equities as at February 2024.

What's new?

Like the Compact, the Accord is a voluntary arrangement – a statement of ambition, not legally binding. The signatories include various large DC schemes and providers: Aegon, Aon, Aviva, Legal & General, Lifesight, M&G, Mercer, NatWest Cushon, Nest, NOW: Pensions, Phoenix Group, Royal London, SEI, Smart Pension, the People’s Pension, TPT and the Universities Superannuation Scheme.

Signatories aim to invest growth-phase assets in their main default funds such that, by 2030:

• at least 10% are allocated to property, infrastructure, private credit, private equity and venture capital; and
• within this, at least 5% are allocated to the UK.

Assets may be held either directly or through unlisted funds. AIM and Aquis shares will potentially count towards the targets. FAQs explains how "UK assets" are to be determined:

• For private equity and venture capital, UK assets should reflect underlying investments in UK registered private companies or partnerships.
• Infrastructure and property will be a UK asset if located in the UK. (Only unlisted assets are in-scope.)
• For private credit, UK assets should reflect borrowers located in the UK.

The Accord does not replace the Compact – the two will run in parallel. Where a scheme or provider has put its name to both, progress in meeting the Compact target will count towards the Accord.

Caveats

Two caveats feature prominently in the Accord.

First, the ambitions of signatories are subject to their fiduciary duties or to the consumer duty under the FCA's rules, as applicable. In other words, the interests of scheme members must come first.

Second, successful delivery will depend on "critical enablers", including:

• a pipeline of suitable investment opportunities, facilitated by the Government;
• the launch of a suitable new value-for-money (VFM) framework, and a general shift from cost to value; and
• as regards the proposed "minimum size" requirements for DC schemes, a "pragmatic, well-sequenced" approach which does not deter private markets investment.

Comment

Less than two years after the Mansion House Compact, the Accord amounts to a step-change. The overall target for private markets investment is doubled; a UK-specific target has been introduced; and a broader range of assets is in scope. Last but not least, there are new signatories. The 17 parties to the Accord account, between them, for £250bn of default fund assets. And that's just on current figures. The total is likely to rise significantly by 2030, as the DC market grows and consolidates.

Small wonder that the Government, with its productive investment agenda, was keen to get the Accord across the line. Press reports suggest that the Treasury warned it might mandate particular asset allocations, if targets were not agreed voluntarily.

Will signatories to the Accord deliver on their ambitions? The scale of the challenge is not quite as great as the February 2024 figures, mentioned above, might suggest. Whilst only 0.36% of Compact signatories' assets were invested in unlisted equities, the proportion would have been much higher – about 3% – if, as under the Accord, unlisted infrastructure had been taken into account.

Nevertheless there are significant obstacles. The Accord rightly flags the fact that any increase in private markets investment will need to be squared with duties to act in the interests of scheme members. There are also significant practical and policy challenges, mentioned in the Accord and in last year's ABI update. Rules about performance fees and "permitted links" need to be reconsidered. More fundamentally, the FCA and the Government will need to reassess their VFM and minimum size proposals. There are concerns that, as currently formulated, the proposals could deter sophisticated investment and encourage herding.

Of course, many DC schemes and providers will not have signed either the Accord or the Compact. The Government's thinking, presumably, is that such schemes will typically either adapt to a "new normal" in which private markets investment becomes commonplace, or wind up and consolidate. Again, the VFM framework and minimum size requirements will be key.

And if the industry fails to deliver on its ambitions? The spectre of "mandation" has not gone away. According to press reports, the Treasury has said that the Pension Schemes Bill will include "power to set binding asset allocations". No doubt that would be a last resort. A statutory mandate could override fiduciary and consumer duties, but would inevitably be controversial. The Government has apparently conceded that "guardrails" would be needed to safeguard members' interests.