Mansion House Compact II: A sequel that comes with a big stick

This morning, Rachel Reeves, Torsten Bell and the Lord Mayor of London unveiled ‘Mansion House Compact II’ – and agreement signed by 17 pension firms, in which they have committed to allocate at least ten per cent of their defined contribution (DC) funds into private markets by 2030, of which five per cent will go to UK private markets.

As sequels go, like the Godfather Part II, the Dark Knight and possibly Toy Story 2, this one seeks to surpass its original, negotiated by then Chancellor Jeremy Hunt in 2023, in which pension schemes pledged to commit five per cent of assets in their default funds to unlisted equities by 2030. This new version seeks to double that allocation with a specific focus of UK markets that would provide an additional ‘£25 billion economic boost’. And while both agreements have been positioned as ‘voluntary’, this new version comes with a big stick -- an implicit threat the government could legislate to give themselves “mandating power to set binding asset allocations” for pension funds, if they are not making sufficient progress. 

Why is the government pushing for this? Well, they have been clear that they want the pension sector to take a more active role in investing in the U.K. economy and have come to the view that private markets provide an effective way of doing this (interestingly this agreement is not about reviving the London Stock Exchange or UK public markets). 

A consensus seems been growing that private markets are now seen as the best way to unlock investment in the infrastructure and innovative growing companies. As Larry Fink highlighted in his annual letter a few weeks ago:

“Assets that will define the future—data centers, ports, power grids, the world’s fastest-growing private companies—aren’t available to most investors. They're in private markets, locked behind high walls, with gates that open only for the wealthiest or largest market participants. The reason for the exclusivity has always been risk. Illiquidity. Complexity. That’s why only certain investors are allowed in. But nothing in finance is immutable. Private markets don’t have to be as risky. Or opaque. Or out of reach. Not if the investment industry is willing to innovate..”

In theory, DC pension funds could be well-suited to long-term private market investment and the UK government has argued that large Canadian and Australian pension funds have been better able to take advantage of these investment opportunities, while UK DC pension funds have been seen as too risk averse and fragmented. This agreement, therefore, is part of a series of pension reform announcements, which are expected to consolidate UK pension funds and make them better suited to investments that help the UK government’s growth ambitions. 

These measures are not without their critics. There are a number of concerns about private markets on issues such fees, lack of transparency and liquidity risks. But perhaps the wider concern within the pension industry is how these new requirements align with pension funds’ fiduciary duties (to secure good outcomes for members). After all, pension savers do not see the role of their savings to save the UK economy or support the current government. Many in the industry are particularly uneasy about the threat of mandation.

However, the government appears determined to press ahead, with further pensions reforms expected to be announced in the coming weeks and legislation expected to be published before the summer – it will be a busy time for the UK pensions sector.