In a significant move poised to inject billions into the British economy, a coalition of the UK’s largest pension schemes has committed to a substantial increase in their investments in domestic assets.

This landmark agreement, dubbed the Mansion House Accord, will see these schemes collectively allocate at least 10% of their workplace portfolios in assets to private markets by 2030, with a minimum of 5% specifically directed towards UK-based opportunities.

This ambitious target, which builds upon the foundations laid by the 2023 Mansion House Compact, is expected to unlock at least £25 billion ($33.4 billion) for the UK economy by the end of the decade. The initiative has garnered strong support from the government, with Chancellor of the Exchequer Rachel Reeves hailing it as a “milestone in our plan to ensure that the pension system works better for savers.”

Speaking at a signing ceremony in the City of London, Reeves emphasized the dual benefits of the Accord: “I welcome this bold step by some of our biggest pension funds, which will unlock billions for major infrastructure, clean energy, and exciting startups – delivering growth, boosting pension pots, and giving working people greater security in retirement.”

Minister for Pensions Torsten Bell echoed this sentiment, stating: “Pensions matter hugely, they underpin not just the retirements we all look forward to, but the investment our future prosperity depends on.”

The Mansion House Accord has been jointly spearheaded by the Association of British Insurers (ABI), the Pensions and Lifetime Savings Association (PLSA), and the City of London Corporation. Based on the current investment holdings of the participating providers, the total pension assets within the scope of this agreement amount to £252 billion ($336.6 billion), a substantial figure that is expected to grow over the Accord’s lifetime.

Innovation and infrastructure

The influx of capital is strategically aimed at bolstering key sectors of the UK economy. A significant portion of the funds will be directed towards infrastructure projects, including vital clean energy developments, which are crucial for enhancing energy security and driving down household bills. Furthermore, the Accord seeks to provide essential growth finance to Britain’s world-leading science and technology businesses, fostering innovation, creating jobs, and ultimately increasing disposable income for households.

Yvonne Braun, Director of Policy, Long-Term Savings, Health and Protection at the ABI, emphasized the industry’s commitment: “As major investors, the pensions industry already plays a vital role in driving growth in the UK and globally. The accord formalizes the industry’s ambition to invest more in private markets to diversify investments, support innovation and infrastructure, and ensure prosperity. Investments under the accord will always be made in savers’ best interests.”

Zoe Alexander from the PLSA added: “With everyone playing their part, there is great potential to boost returns for savers while providing vital funding to productive growth areas.”

Facilitating investment

The success of the Mansion House Accord is predicated on a collaborative effort between the pension industry and the government. The government has pledged to take concrete action to ensure a robust pipeline of suitable investment opportunities for pension schemes. This includes addressing barriers to investment and effectively delivering wider pension reforms.

The Lord Mayor of London, Alastair King, underscored the importance of this partnership: “This is not just about better pension outcomes, it is about building a more dynamic, competitive investment ecosystem. Delivering long-term, sustainable growth is crucial and the City of London Corporation is delighted to have partnered with industry and government to bring this ambition to life.”

Challenges and the path forward

While the Mansion House Accord represents a significant step forward, challenges remain. Concerns have been raised regarding the need for policy certainty and structural reforms to ensure a consistent and attractive investment landscape. The complexity of the UK’s planning system and historical shifts in government policy have been cited as potential hurdles for infrastructure investment.

Furthermore, ensuring that these investments genuinely deliver value for money for pension savers, with a focus on net returns, will be crucial. The industry has emphasized that all investment decisions must prioritize the best interests of the savers.

Comparable Australian schemes invest significantly more in private markets and domestic companies than UK schemes, and research suggests greater investment in private markets can deliver security through diversified asset holdings and potentially drive higher returns. Mitchell Hubble, Principal Consultant at Pathlight Associates, referencing his experience in Australian financial advice space, commented, “those calling for pension reform regularly point to Australia as an example of what the UK should be aiming for.

“Whilst the voluntary agreement signed today by the country’s leading defined-contribution pension scheme providers should support the UK’s economic growth, there are other more pressing lessons to be learned from the Australian system. For example, making it easier for individual consumers to consolidate their pensions pots, and putting tougher regulations on funds that are underperforming, which would increase transparency and encourage consumers to move their money to more productive funds.”

Despite these challenges, the prevailing sentiment surrounding the Mansion House Accord is one of optimism. It is viewed as a pivotal moment in aligning the interests of pension savers with the broader goals of national economic growth, potentially creating a virtuous cycle of investment, innovation, and prosperity for the United Kingdom. The coming years will be critical in observing how this ambitious initiative translates into tangible benefits for both pension pots and the UK economy.