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Rachel Reeves will on Tuesday set out contentious “backstop” plans to force large pension funds to invest up to £50bn in private assets if they fail to meet voluntary targets in a new “Mansion House accord”.
Treasury officials said the UK chancellor would legislate later this year to create a reserve power for ministers if the accord fails to deliver results.
The announcement comes as 17 of the UK’s largest pension funds pledged on Tuesday to invest at least 10 per cent of their assets in private markets by the end of the decade, half of which will be invested in the UK.
The agreement follows former Conservative chancellor Jeremy Hunt’s original 2023 Mansion House compact, signed by 11 pension funds pledging to invest up to 5 per cent in private equity by the end of the decade.
The Treasury said progress against the new commitment would be “monitored and the initiative will be reinforced by measures to be announced in the upcoming final report of the pensions investment review”.
One Treasury official said: “We are confident the market is moving in the right direction and we won’t have to use mandation at this stage. But it’s an important backstop.”
Shadow chancellor Mel Stride told the Financial Times the idea smacked of “desperation”, adding: “Pension funds must be free to make investment decisions based on what’s best for savers.”
But Treasury officials say it is vital that the pension funds deliver on their commitment to ensure better returns for savers and to inject up to £25bn into the UK economy by 2030.
They also argue that the threat of mandation will ensure the whole industry will deliver the Mansion House accord, by avoiding the risk that some companies might hold back to see what others do.
The accord was jointly led by the City of London Corporation, the Association of British Insurers and the Pensions and Lifetime Savings Association.
Alastair King, Lord Mayor of the City of London, hailed the new commitment: “Now we’ve got asset classes such as infrastructure, private equity, property and private debt and a number of extra companies have signed up plus also this UK element which I think is significant.”
He added that based on his conversations with other sovereign wealth funds, notably in the Gulf and far east, he was optimistic that a greater commitment from UK pension funds to invest more at home would draw in more international capital to UK projects.
“Here is a real opportunity to pump a number of local lead investors into projects that will allow the sovereign wealth funds to crowd in behind,” the Lord Mayor said. “It’s an important point that has not been made enough.”
The government’s legislative underpinning of the Mansion House pact comes amid criticism that the original compact had failed to have much impact on fast-growing companies 18 months after it had been introduced.
Steve Bates, chief executive of the BioIndustry Association, said there was “still no meaningful participation from UK pension funds in supporting the growth of the UK life science sector”.
A study by New Financial, a think-tank, last year found that the UK’s DC pension funds invested 2 per cent of total assets in private equity and 2 per cent in infrastructure.
Signatories of the new Mansion House accord say that more investment in private markets will help support the UK’s real economy and also enhance investment returns.
However, forecasts from the government’s actuarial department in November showed its “private market” model portfolio delivered just 2 per cent more over 30 years than its equivalent “baseline” portfolio without exposure to private markets.
The Mansion House accord comes ahead of the final report of the pensions investment review due later this spring, which pensions minister Torsten Bell said in March would provide “end point clarity” on how ministerial reforms would boost investment in productive assets.
Reeves said: “I welcome this bold step by some of our biggest pension funds, which will unlock billions for major infrastructure, clean energy and exciting start-ups — delivering growth, boosting pension pots and giving working people greater security in retirement.”
