The UK pensions sector is launching a major boost to British business this week, with 17 pension schemes signing up to a voluntary initiative called the Mansion House Accord. UK government ministers intend this to help boost the UK economy to the tune of £25bn.
The response from the pensions sector has been flagged up as a much-needed boost to UK capital markets, but some voices in the City are doubtful whether this is the formula needed.
What is the Mansion House Accord?
The new Mansion House Accord asks pensions to make a 10% allocation to private markets with a 5% commitment specific to the UK, which includes investments in assets such as high growth private companies and cutting-edge renewable projects such as wind and solar farms. These types of investment can not only improve financial outcomes but also positively impact savers’ standards of living in retirement.
“This is just window dressing,” said Neil Wilson, an investment strategist with Saxo in London. “Investing in private companies is a nice idea and is a definite positive for entrepreneurs in the UK, which could help drive economic growth. But there are so many conditions attached – fund managers won’t be deviating from their risk models to satisfy some voluntary code. Note that any investments would ‘subject to fiduciary duty and the consumer duty’ and ‘assuming a sufficient supply of suitable investable assets’. Plenty of caveats to mean this lofty £50bn seems more like a ceiling than a target.”
Wilson said there needs to be more focus on boosting capital markets. “Pension funds have gone from owning about 50% of UK equities to 5% in the last couple of decades – this is an urgent problem area that they ought to focus on,” he said.
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While the Mansion House Accord saw a broad welcome from the UK pensions industry, Wilson is right in that the emphasis is very much on private assets. For example, NatWest Cushon, the workplace and savings fintech, says it will allocate to private assets and real estate vehicles, including Long Term Asset Funds (LTAFs). The emphasis is very much on long-term, unlisted investment strategies, like solar farms.
Phoenix Group LON:PHNX flagged up the launch of its Future Growth Capital, a private markets investment manager it formed to deliver commitments made in the initial Mansion House Compact. While Future Growth Capital will commit over £2.5bn over three years to the UK’s most exciting, innovative and fastest-growing companies, it does not address ongoing problems with public markets.
But what about the AIM market?
The Accord does not tackle issues with the UK’s AIM Market, for example, which continues to shrink. There are less than 700 companies now trading on AIM, its lowest level since 2001. Companies still listed on AIM complain about the excessive red tape and costs associated with the market. According to UHY Hacker Young, it costs around £600,000 to list on AIM, and a further £500,000 per year to remain listed.
The perceived cost of listing on AIM has also damaged the London IPO market.
“The AIM IPO pipeline needs a jumpstart,” said Colin Wright, UK Group Chairman at UHY Hacker Young. “Cutting back on some of the regulations surrounding AIM could help provide that. Trimming some of the reporting and less important corporate governance burdens on AIM companies would make the market more competitive. Ever stricter rules for AIM companies have increased the quality of companies on AIM but perhaps that process has gone too far.”
The new Labour government has asked regulators to take a radical approach to cutting red tape to deliver growth, but the London stock market is yet to see these benefits feed through.
When the question of investing more in UK assets was put to 1,563 UK pension savers by YouGov LON:YOU on behalf of NatWest Cushon, a net 52% of people agreed they want more of their pension invested in the UK in a way that promotes a higher standard of living for them in retirement. Just 8% disagreed.
