Pension fund investments in UK private markets – Mansion House Accord signed but possibility of mandation still looms large

Accord announcement

With seventeen signatories, rather than eleven, and a target double the size, the Mansion House Accord announced on Tuesday may be seen as a bigger, bolder version of the 2023 Mansion House Compact.  And one which, crucially, and for the first time, includes a commitment to seek to allocate a minimum percentage of default DC funds (5%) to domestic private market assets in the UK (the 2023 Compact allocation related to unlisted equities but didn’t specify UK).

To recap, the Accord is a voluntary expression of intent by the signatories “to achieve a minimum 10% allocation to private markets across all main default funds in their DC schemes by 2030, with at least 5% of the total going to UK private markets”.  The Accord highlights the commitment is subject to fiduciary duties and the Consumer Duty and relies on Government support, including a number of “critical enablers”.  These include a pipeline of UK investment opportunities, and a market-wide shift in focus from cost to value, supported by the new Value for Money framework. 

Mandation not dismissed

However, whilst yesterday’s announcement received plenty of fanfare and media attention, it may not be the end of the story when it comes to UK investments and DC pension schemes. Stories have been circulating for many weeks now of growing industry concern that some form of UK investment mandation is being closely considered by the Government, fuelled by Treasury reportedly “refusing to rule out” mandation.   

An FT report from last week (9 May) noted that a group of leading UK equities specialists had met with the government’s special adviser on business to discuss ways to “revitalise” public equity markets, and urged Varun Chandra to consider targets for minimum levels of investment by UK pension funds, including through mandation.  Although the discussion related to public equity and the allocations in the Accord relate to private markets (defined as unlisted assets – equities, property, infrastructure and debt/credit), last week’s discussion highlights the economic pressure the Government is under. 

It seems therefore, notwithstanding the Accord announcement this week, the prospect of mandating minimum levels of investment in UK assets has not gone away.  Discussing the Accord and the possibility of mandation in an appearance on Bloomberg tv on Tuesday (13 May) Rachel Reeves said “I’m never going to say never”, although she did follow that by saying “but I don’t think its necessary”.  However, reports yesterday (14 May) suggest that “sources close to the Treasury” have suggested that the output from phase one of the pensions investment review “will recommend granting the government temporary powers to enforce binding investment targets if voluntary commitments fall short”.  The thin end of the wedge; the cupboard door has been opened, revealing the stick.  DC funds are now invited to choose their carrots.

Comment

The suggestion that the Government should have even temporary powers to direct how private pension schemes invest their assets would mark a significant shift in approach.  Whilst of course, statutory provisions including the Investment Regulations, together with a scheme’s governing documentation, give a framework for how trustees use their powers of investment, ultimately trustees of DC schemes acting within those parameters have had the freedom to invest their default funds in what they consider to be the members best financial interests.  In other words, in accordance with their fiduciary duties.  How would a new power for the Government to compel a DC scheme to meet a target for a minimum level of UK investments interact with those fiduciary duties? Will overriding mandation answer that question – will it apply to a certain proportion of assets to the exclusion of fiduciary duties, while fiduciary duties apply to the remaining assets?

As we’ve highlighted previously, this is an issue that has attracted significant industry concerns, both around the interplay with trustees’ fiduciary duties, and the potential to fetter trustee discretions in a way which is (currently) prohibited – you can read more in our in depth article on trustee fiduciary duties here. 

If, as current chatter suggests, mandation remains on the table, and an enabling power might even find its way into the forthcoming Pension Schemes Bill (expected imminently) this will be a very considerable development requiring careful legal scrutiny.  We will be monitoring further developments in this area closely, so please do look out for further updates.