Mansion House II: a new Compact

In our first blog on the Government’s Mansion House reforms we considered the humble fiduciary duty, and its potential to deter trustees from investing in UK growth assets.

In this second blog we turn our attention to proposed changes to the Mansion House Compact. This is a different strand of Government policy – the Compact is not legally binding, but rather a voluntary code aiming to increase investment in unlisted equity.

The original Compact

The original Compact was announced in 2023 by the then Chancellor, Jeremy Hunt. It is a voluntary, non-binding agreement between 11 of the UK’s largest DC pension providers to allocate five per cent of assets in their default funds to unlisted equities by 2030. However, while many of the initial signatories are understood to have taken key preparatory steps, only limited amounts have so far been invested. The Association of British Insurers published a report one year on from the Compact launch in which it noted that Compact signatories then held nearly £800m of unlisted equities in their DC default funds – just 0.36 per cent of their DC default fund total. (To be fair, their default funds also held a further £5.7bn in infrastructure assets structured as unlisted equity, but such investments were explicitly excluded from the scope of the Compact.)

A new hope

Pensions and news publications have recently been trailing the announcement of a new Compact by the current Chancellor, Rachel Reeves, this July. This will seek pension providers’ commitment to investing 10 per cent of their default funds in unlisted assets by 2030, with half of that devoted to UK assets. It was reported that a first draft of the new Compact was circulated following negotiations between Treasury ministers, the pensions industry and the City of London Corporation. The new commitment would, if accepted by key providers, see approximately £100bn of UK pension savings invested in unlisted assets by the end of the decade, with around £50bn invested in the UK. 

A material change

Whilst the new Compact does nod to concerns that unlisted equity investment should not be too UK-centric, a move from five to 10 per cent is a material step up and it remains to be seen what pension providers make of it. Furthermore, the ABI’s report outlines several barriers the Compact signatories experienced in the first year, including finding the right fee structures, employer focus on costs rather than value, managing appropriate liquidity and restrictions imposed by legacy terms and conditions. All of these barriers would be thrown into sharper focus by increasing the desired Compact investment percentage.

Where does that leave DC schemes?

The Compact is voluntary, but discussions are taking place in the shadow of draft legislation. Recent reporting suggests that the Government is using the prospect of mandatory investment allocations as an incentive for pension providers to commit – and implement – the revised Compact. One way or another, it looks like default funds will increasingly feature unlisted equities, with particular growth in domestic investment. 

For more resources on Mansion House please visit the Pensions Hub.