The workplace pensions market has now had a month to fully digest the implications of the Mansion House Accord.
The Accord doubles the targeted private markets allocation compared with the Mansion House Compact of 2023, aiming to have 10 per cent of default funds invested by 2030 rather than the Compact’s 5 per cent.
The Accord’s target for half of that 10 per cent to be invested in the UK has arguably met most resistance, especially when coupled with a threat to mandate changes in asset allocation in the form of a reserve power in the just published Pension Schemes Bill.
Signatories and non-signatories
The Accord was signed under the auspices of the Association of British Insurers, the City of London Corporation and the Pensions and Lifetime Savings Association (now Pensions UK). But the main signatories are of more relevance for corporate advisers, trustees and employers and scheme members. A total of 17 providers signed the Accord, a significant increase on the 11 that agreed to the earlier Compact.
These firms are Aegon UK, Aon, Aviva, Legal & General, LifeSight, M&G, Mercer, NatWest Cushon, Nest, Now:Pensions, Phoenix Group, Royal London, Smart Pension, the People’s Pension, SEI, TPT Retirement Solutions and the Universities Superannuation Scheme.
One might quibble over the inclusion of both Mercer and Now: Pensions as Mercer owns Now through its recent purchase of Cardano, though they run separate default strategies at present.
There is also a minus one, with Scottish Widows saying it would meet its Mansion House Compact obligations but not take part in the updated Accord. Among the other major players Fidelity and Hargreaves Lansdown also decided not to participate.
Red lines
It is also notable that some of the signatories of the Accord, a few days after officially signing, described mandation as a red line, including Amanda Blanc, Group CEO of Aviva UK, whose comments came before the reserve power plan was officially unveiled.
When asked for the latest view, an Aviva spokesperson was diplomatic, saying: “We welcome the proposals which will help get more savers into larger schemes that can offer better value and more opportunities to invest in UK businesses and infrastructure.
“We must recognise that DC funds should ultimately be invested in the interests of individual pension savers to help diversify risk and support returns. Trustees should retain their fiduciary duties, as they understand member needs and the appropriate investment strategies to meet savers long-term savings goals.” Non-signatories have, unsurprisingly, expressed some wariness as well.
Investment should follow opportunities
Helen Morrissey, head of retirement analysis, Hargreaves Lansdown says: “Private assets can act as a key diversifier in long-term portfolios with the ability to boost people’s retirement incomes alongside the UK economy.
“However, for these reforms to work, it is vital providers are given the flexibility to implement changes as the best opportunities present themselves rather than to a specific timetable. This is in line with the pension industry’s role to always secure the best outcomes for its members.
“With this in mind, it’s positive to see the pledge in Mansion House that government and regulators must support the industry in securing a pipeline of suitable UK investment opportunities for schemes to invest in. If there is a stream of suitable good quality investment opportunities, then the investment will naturally follow.”
Fidelity International, another to withhold its signature, has embraced private markets, but is very clear it is no fan of mandating asset allocations.
Reserve power – a concern
James Carter, head of platform policy, says: “Fidelity International has a strong conviction in the merits of investing in private markets to support better outcomes for pension scheme members. For our DC clients and members, whose investment horizon is measured in decades not years, we believe there is strong alignment in objectives of private market assets and member objectives.
“However, we continue to believe that pension schemes must be allowed to direct pension assets in members’ best interests, without a mandatory requirement to invest in specific markets or assets. Whilst the Government acknowledges progress being made by industry to invest in productive finance assets, the reservation of a power to direct pension scheme investments in the future remains a concern for Fidelity.
“Whilst we welcome the Government’s focus on private market allocations in defined contribution schemes, we are unable to sign this Mansion House Accord at this stage. We are committed to offering pension scheme members the best possible outcomes, selecting the very best investments regardless of where they are located globally.
Carter notes that FutureWise, the firm’s £17.9bn single default investment strategy, has already integrated private assets via a 15 per cent allocation to a Long-Term Asset Fund (LTAF), offering globally diversified exposure across private equity, private credit, infrastructure, real estate and natural resources. In the next three years, the firm plans to gradually increase exposure, giving a 10 per cent allocation in the growth phase.
Sword of Damocles
Advisers are also sceptical about forcing allocations and nervous about the future uses a reserve power might be put to.
David Brooks, head of policy at Broadstone, says: “It remains to be seen how mandation will work in practice. The battleground is likely to be over definitions and the details of the Accord as well as the opportunities that the Government creates. The direction of travel for the industry is certainly towards the allocations desired so long as the opportunities are there, and it seems undesirable on both sides to use legal power to force investments.
“If the Government did want to use its backstop law to challenge the industry, it may have a legal case to do so but it could struggle on a performance basis, especially in the short-term. Further work in the transparency of performance metrics will need to be done – whether that is for or against mandation.”
“There is a longer-term concern that once a law is in place, the pensions industry will have this sword of Damocles overhead, waiting to be used for the purposes of any future administration. There is a lack of clarity, too, over what the potential recourse would be for those not meeting allocation targets and what wriggle room there is around allocation fluctuations, tolerances and outcomes for members. The elephant in the room remains the case to be made that this is in the best interests for members.”
VFM challenge
He adds that in the midst of the debate around allocation mandation, the VFM framework becomes more important than ever, and could even backfire in the short term.
“If performance is a metric for whether a provider can remain open or not – but those with larger allocations to private markets (and UK private markets) are poorly performing – does the government have to give them a pass for doing as they want?”
Alison Leslie, head of DC investment services at Hymans Robertson says that generally the Accord has been seen as a positive, including by clients.
She says: “It strikes a good balance between fiduciary duty and moving the policy agenda forward. The Pension Schemes Bill and Pension Investment Review are positive changes to potentially boost member outcomes in retirement.
“We remain cautious regarding the reserve power which will be introduced. We believe these investments should stand on their own merits, however that does not mean that allocations to the UK are therefore precluded. We see good examples in the LGPS where investment in the UK private market space has worked well.
“Inclusion of diversification in strategies, including private markets, is seen as a positive in reviewing provider strategies but clearly is not the only component. We do expect, however, allocation to private markets to increase over time.”
Looking at some of the detail and considering which defaults the Accord may apply to, Mark Searle, head of DC investment at XPS Group says: “Similarly to the final report of the Pension Investment Review, the actual definition of default isn’t clear in the Mansion House Accord.
“But we note that there is limited space for defaults to exist outside of the main scale default arrangements. Any additional defaults will come under scrutiny following the suggested approach to addressing fragmentation, but they may be deemed beneficial under similar measures to the proposals under which new defaults could be created i.e. to meet the needs of a protected characteristic, an ethical need or perhaps to help an employer manage conflicts of interest.
“We would like the definition used to be broad enough to cover defaults that are essentially the same strategy but differ closer to retirement due to different target retirement outcomes (e.g. annuity versus drawdown). Or, for example, target date funds that all have similar underlying investment design but differ because of known (or expected) differences between the retirement cohorts.”
He says he is concerned that with mandation asset owners will pay too high a price or are forced into too low-quality assets. This would ultimately result in weaker longer-term performance which is undesirable because it would likely undermine the use of these assets in pension scheme portfolios over the longer term.
As with Brooks, he is concerned that once government sets the precedent, future governments will feel more empowered to act similarly to meet different policy objectives. He suggests that government intervention is “perhaps more palatable for public sector DB pension schemes because the State ultimately bears the risk”.
Asked whether the reforms might influence scheme choice for trustees and employers, Searle says: “We’ve long been advocates that investment governance and decision making must be sufficiently robust before making an investment in complex assets, such as private markets.
“We anticipate, and indeed recommend, that any trustees considering consolidation into a master trust, or employers considering future benefit provision, should fully understand how the additional risks that accompany the Mansion House Accord will be managed when choosing a provider.”
