Mansion House Compact signatories have laid strong foundations needed to implement the ambition of defined contribution (DC) default funds allocating 5% of their assets to unlisted equity by 2030, according to a recent update published by the Association of British Insurers (ABI).
The Mansion House Compact is a commitment announced by the then UK chancellor, Jeremy Hunt, in his keynote policy speech at Mansion House, the official residence of the Lord Mayor of London, on 10 July 2023.
It calls on DC pension schemes to boost investment in UK unlisted equities and, as part of the compact, signatories are expected to allocate at least 5% of their default funds to unlisted equities by 2030.
The initial signatories of the compact included Aviva, Scottish Widows, Legal & General, Aegon, Phoenix, NEST, Smart Pension, M&G and Mercer. Since then, Aon and Cushon have also joined the list.
ABI said that signatories of the compact currently hold £793m of unlisted equity assets in their DC default funds, an equivalent of 0.36% of the total value of their DC default funds (£219bn).
Since the compact was announced, firms have reported taking “key enabling steps” to ready themselves for progress on the industry-led initiative.
These include hiring, training or new partnerships. ABI pointed out that 10 out of 11 companies have taken steps to establish or expand their expertise in unlisted equity investment – such as through training or recruitment.
In addition, eight out of 11 signatories have started developing specific solutions to enable increased unlisted equity investment, such as long-term asset funds (LTAFs).
For example, L&G launched a fund this month for DC savers, to give them the opportunity to access private-market exposure. It has already integrated this fund into its default options in its master trust and group personal pensions.
The association said that testing client appetite for such investments has also returned positive signs, with seven out of 11 signatories reporting support for the ambitions among clients.
Barriers
Barriers to investment in private markets have reduced in recent years and progress has been made from an operational and regulatory perspective. Nevertheless, all signatories said they have encountered or are aware of significant remaining operational/technical barriers to increasing investment in unlisted equities.
Multiple signatories said that performance fees are a challenge. It was noted that managing appropriate fee structures remains problematic, and that certain fee models commonly used in private capital markets may be financially unfeasible.
The absence of guidance from the Financial Conduct Authority (FCA) for group personal pensions, equivalent to regulations from the Department for Work & Pensions (DWP) that allow exclusions of performance fees from the charge cap, was noted in ABI’s update.
Another barrier cited by multiple signatories was permitted links. ABI said that the majority of fund structures suitable for private assets do not comply with permitted links rules, making it too challenging for providers to invest in unlisted equities, as one noted.
Signatories stated that these challenges mean that alternative structures need to be developed to allow access to typical venture capital or private equity funds, working around or outside the investments offered via life insurance companies and their platforms.
And while signatories said that LTAFs overcome the permitted links rules barrier they also raised challenges. For instance, ABI pointed out that one signatory said LTAFs are expensive, have a lengthy approval process and are cumbersome, so schemes may need to look beyond this vehicle.
Policy interventions
Mansion House signatories suggested several policy interventions to realise the ambitions of the compact. These include reviewing LTAF regulations to ensure they are not burdensome and do not go against customer outcomes, and changes to permitted links rules to enable access to frequently used fund structures.
Signatories also called for the government to consider increasing minimum contributions alongside the aims of the compact, pointing out that increased inflows of new money would allow a greater level of compact-related investment.
In addition, policymakers have been asked to clarify their fiduciary duty to encourage a universal ownership approach and enable trustees to consider the wellbeing of their members beyond financial factors.
Lastly, signatories asked for performance fees to be allowed to fall outside of charge computation for group personal pensions in the same way that is permissible for occupational pension plans and encourage investment in a ‘range’ of productive assets, such as infrastructure and real estate, rather than emphasising primarily private equity and venture capital.
Yvonne Braun, ABI’s director of policy and long-term savings, said: “The progress at this relatively early stage is encouraging. It’s clear that signatories have laid strong foundations to start implementing the ambition in the Mansion House Compact to allocate 5% of their default funds to unlisted equity.”
She added that it is evident that the “single biggest challenge” to pension schemes and providers realising this ambition is the overfocus on cost by those selecting schemes.
Braun said this is acting as a barrier to developing stronger long-term value propositions that deliver better consumer outcomes. “That is why it is absolutely essential to get the value for money framework right,” she noted.
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