UK Pensions Reform “Catalyst” for Impact Investment  

Reforms to the pensions industry announced by UK Chancellor Jeremy Hunt raises hopes and concerns amongst pension experts.  

A commitment by UK defined contribution (DC) pension schemes to invest 5% of their assets to unlisted equities could boost allocations to green and impact investments, experts have said, but concerns have also been raised about DC schemes investing “by edict”.  

The pledge, made by nine of the UK’s largest DC pension providers, forms part of so-called Mansion House Reforms, announced by UK Chancellor Jeremy Hunt this week, to boost pensions and increase investment in British businesses.  

The ‘Mansion House Compact’ members are Aviva Investors, Scottish Widows, L&G, Aegon UK, Phoenix Group, Nest, Smart Pension, M&G and Mercer, which combined represent £400 billion (US$524 billion) in assets and the majority of the UK DC’s workplace pensions market.  

They have committed to allocating 5% of assets in their default funds to unlisted equities by 2030. The UK government said the move could unlock up to £50 billion of investment in high growth companies by 2030 if all UK DC pension schemes followed suit.  

Tim Orton, Chief Investment Officer at Aegon UK, said the Compact would create opportunities that help to deliver its climate targets as it progresses towards net zero and Mike Eakins, Chief Investment Officer at Phoenix Group, said with the right regulatory framework it could invest in sustainable and/or product assets to support economic growth, levelling up and the climate change agenda whilst also keeping policyholder protection at its core.  

“Loose commitment” 

Jonathan Parker, Head of DC at Redington, said he welcomed the commitment, saying it could help the UK deliver on its net zero ambitions, but also said it was a “loose commitment”, which could take years for the impact to start feed through.  

“There is a lot of genuine excitement and desire to deliver,” he told ESG Investor. “But ultimately it is a voluntary commitment and I do have concerns that once the excitement has died down there’s a risk it gets forgotten.”  

He pointed to other countries such as Australia and South Africa that required their pension schemes to invest at least 20% of their assets in domestic equities.  

But, Charlotte Moore, a UK pensions expert, warned that pension schemes shouldn’t be “doing investment by edict”.  

“They have to come to that conclusion themselves,” she said, noting that the language from the UK government on how pensions should invest had seen a ratcheting back on the language used this year by some UK political figures such as Shadow Chancellor Rachel Reeves, former British Prime Minister Tony Blair and Tory peer Ros Altmann which had been much stronger and was “about compulsion”.  

“The government has obviously had a long hard chat with the industry and has a much greater understanding of the complexity of doing all this,” she said, adding that alternative assets weren’t necessarily a “magic bullet” for UK growth, sustainability or returns per se. 

The UK government has said its reforms will unlock up to £75 billion of additional investment from DC schemes and local government pensions, supporting the Prime Minister’s priority of growing the economy, and delivering tangible benefits to pension savers.

Separately, as part of the reforms, the government will also consult on its local government pension schemes (LGPS) sector doubling existing investments in private equity to 10%.  

But, Moore said that a DC or general pension scheme would do what’s in the best interest of its members and that the Mansion House commitment gave DC schemes a lot of “wiggle room”.  

Very few pension schemes invest in venture capital. It could be done in the future but given it’s high risk it would need to be well diversified,” she said. “They might put something into private equity but they will do that on a global basis. And why not choose to invest in infrastructure as part of this commitment? There’s still a lot of confusion about what that 5% actually is and where it’s going to go.”  

On whether the reforms opened opportunities for pension schemes to allocate more to green or impact investments, Moore said they needed to be thinking portfolio-wide about sustainability, “there’s a danger that people automatically think that impact equals alternative assets”.   

But, David Brown, Director and Training Lead at Pensions for Purpose, has said that opportunities in private markets brought “additionality” because it was new capital. He added it often gave investors a seat at the board table to influence.  

Commenting on the Mansion House Compact, Brown said it could be a great opportunity as a catalyst to increase allocations to impact investing. “Many of the pension funds signed up have net zero goals and there’s a great opportunity to link private investing to addressing the climate funding challenge.” 

He added that for the LGPS sector it could drive opportunities to invest locally in affordable housing or local infrastructure.

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