According to Chancellor Jeremy Hunt, the average saver will soon be 12% better off each year thanks to a new plan to use pensions to boost UK growth. At the same time, there’ll be an extra £50billion of investment available to high growth companies in the UK.
This plan, known as the Mansion House Compact, sees 9 of the largest defined contribution pension providers pledging to allocate at least 5% of the assets in their default funds to unlisted equities by 2030.
(As a reminder, defined contribution pensions are effectively private workplace pensions. Unlike defined benefit pensions – otherwise known as final salary – they don’t provide a guaranteed income in retirement.)
The Lord Mayor introduced the Mansion House Compact by saying:
“We need to talk about the elephant in the room, which is having a particular impact on whether companies stay and scale in the UK. And that is our appetite for risk and attitude to business success.
“A sensible aversion to excessive risk-taking that took hold in the wake of the global financial crisis has, arguably, developed into a full-blown allergy to anything deemed remotely ‘risky’. And it’s our innovative firms that are trying to do something new that are suffering.
“Though we’re good at helping companies off the ground, the UK lacks deep pools of accelerator capital forcing them to head to non-UK capital providers to secure scale-up funding.”
The Chancellor’s plan aims to fund greater investment in the UK without increasing borrowing and debt levels. (The most recent ONS data identified UK general government gross debt as £2,516billion at the end of 2022, equivalent to 101.0% of gross domestic product (GDP).)
It’s worth noting that pension funds already invest around £1trillion in UK assets and the additional £50billion will only be unlocked by the end of the decade if all UK defined contribution pension schemes follow the example set by Aviva, Scottish Widows, L&G, Aegon, Phoenix, Nest, Smart Pensions, M&G and Mercers.
While on the face of it, this is a win-win situation – more money to accelerate UK business growth AND higher returns for savers – I’d like to add a note of caution. There is a fine balance to be struck here to ensure the focus doesn’t slide from pensions acting to secure retirement income for fund members to pensions financing the domestic economy.
Rebecca O’Connor, director of public affairs at PensionBee is quoted as saying: “The Government suggests that the approach will lead to an ‘everyone’s a winner’ scenario, in which retirees get bigger pension pots and innovative UK companies get the capital they need to grow. But there are no guarantees this win-win result will play out.
“While riskier, early-stage investments could generate growth and higher pension pots over the long term, there is also a chance that some of these investments may perform badly.
“Earlier stage businesses are generally riskier and many of them could fail. This is why such opportunities are usually confined to private equity, venture capital and alternative investors, who can stomach large losses.”
This quote plays into my final thought on the matter, which is that it was exactly this kind of startup/unlisted company investment that led to the darling of fund managers Neil Woodford’s fall from grace. Mr. Woodford attracted billions of pounds of UK savers’ hard-earned money because he had a reputation for good returns. It’s a long story, but returns were awful, and it turned out to be impossible to sell the underlying investments precisely because they were startup/unlisted companies. But it’s okay – I’m sure our regulator has learned from any mistakes made and wouldn’t allow it to happen again…