The barrage of recent announcements aimed at directing more money from pension funds into private assets, especially infrastructure and major property development projects, is starting to send ripples of concern across the sector, especially among asset managers and advisers.
The combination of the Mansion House Accord announced in May and the drive to consolidate smaller defined contribution funds into so-called mega funds, each managing a minimum of £25bn, by 2030 will have serious implications for asset managers and pensions advisers, writes Contributing Editor David Worsfold.
The Mansion House Accord, signed at the beginning of May, is seen by the government as a key moment in its drive to unlock billions of private sector investment for a long list of major infrastructure projects. It aims to deliver up to £50bn of investment from 17 pension providers managing around 90% of active savers’ defined contribution pensions.
Signatories to the Accord have pledged to invest 10% of their workplace portfolios in assets such as infrastructure, property and private equity by 2030. At least 5% of these portfolios will be ringfenced for the UK.
This was followed at the end of the month by publication of the Pensions Investment Review – initiated by Chancellor of the Exchequer Rachel Reeves straight after Labour’s General Election victory last July.
The government intends the reforms set out in the report to drive a major consolidation across the DC workplace pensions market. These will be delivered through legislation in a Pensions Schemes Bill:
- Legislating for a larger, more consolidated system to facilitate benefits of scale, with lower costs, an ability to invest in a wider range of assets, and higher returns for savers.
- Reducing the number of default arrangements in the marketplace by preventing new default arrangements from being created and operated, except in certain circumstances with regulatory approval.
- Switching the focus of the pensions system towards value and away from a narrow focus only on cost.
- Taking a reserve power in the Bill which wouldenable the government to set quantitative baseline targets for pension schemes to invest in a broader range of private assets, includingthose infrastructure and major property developments being prioritised by the government.
As the sector digests these major changes, it is becoming clear that they will have some major implications, not all welcome. Asset managers will have to ready to offer clients lower-cost pooled vehicles. In particular, managers offering boutique, niche funds may need to join larger platforms or partner or look for other consolidations options and partners.
Identifying the right expertise and capacity to manage these larger portfolios, especially with high quality experience in private equity, infrastructure, private debt, or Long-Term Asset Funds (LTAFs), will be a top priority for chief investment officers. Asset managers that tick those boxes will be best placed to capture inflows. Those unable to operate at scale may see clients turn elsewhere, potentially opening opportunities for others: for instance, insurtechs competent in managing illiquid portfolios.
This need for deep experience will pose challenges. In a recent letter in the Financial Times, Toby Glaysher, chairman of Finbourne Technology voiced the concerns of many:
“With mandatory thresholds, we are venturing into dangerously prescriptive territory that could do more harm than good. What is being proposed overlooks the operational, technological and governance realities UK pension funds face today. Unlike their larger and more experienced counterparts in Canada, most British pension schemes are still relatively inexperienced in managing diversified portfolios with both public and private assets at scale.
“Private markets bring with them a set of unique challenges. They are opaque, illiquid, expensive to manage, and often updated infrequently. It’s one thing to aspire to hold these investments for their long-term return potential. It’s quite another to do so while maintaining cost-effectiveness, liquidity and accurate pricing.”
Those at coalface of advising the public about their pensions are also expressing their doubts about the plans.
“Forcing pension funds to tilt portfolios toward one geography regardless of market conditions could distort asset allocation, reduce diversification, and expose millions of future retirees to lower performance,” warns Nigel Green, CEO of deVere Group, a global independent financial advisory and asset management firm.
“It’s not the job of pension managers to carry the weight of industrial policy.
“If UK firms are being overlooked, there’s a reason for it. The solution isn’t to coerce capital into local markets. The solution is to make those markets perform better,” he says. “People expect their pension contributions to be professionally managed in their best interests and not treated as a national piggy bank.”
There is little likelihood of the government reining back on these reforms, as they are a key part of the government’s economic strategy, says Reeves:
“Through our Plan for Change, we are choosing to back British businesses and British workers. I welcome this bold step by some of our biggest pension funds, which will unlock billions for major infrastructure, clean energy, and exciting startups — delivering growth, boosting pension pots, and giving working people greater security in retirement.”
