Mansion House Accord: what does it mean for my pension?
The Government has unveiled a new agreement with major pension providers to ensure billions in investment stays in the UK.
The agreement potentially has significant implications for pension holders as it could potentially change some of the ways in which those pots are invested.
Here is a key breakdown of what you need to know and what it means for your pension.
Mansion House Accord
The Mansion House Accord is an agreement between the Government and 17 major pension providers including Aviva, People’s Pension and Royal London.
It is a voluntary arrangement which will see these major providers invest 5% of pension members’ capital into unlisted – i.e. not on the stock market – UK investments by 2030. This, the Government says, amounts to around £25 billion.
On top of this, up to 10% in total will be invested into infrastructure, property and private equity (but not ringfenced to the UK only) in total. This means up to £50 billion of extra cash will now be directed to such investments, which are currently not accessible via major pension funds.
The agreement only affects so-called ‘defined contribution’ or DC pension schemes. Such schemes are the norm for workers, and most will have one with their workplace pension provider. It does not currently impact ‘Defined Benefit’ (DB) or final salary schemes.
While most (around 90%) of the major providers have signed up, there are some notable names missing, such as Scottish Widows.
The Government is very keen to direct more cash toward UK-based investments and welcomes the accord. Torsten Bell, Minister for Pensions, comments: “Pensions matter hugely, they underpin not just the retirements we all look forward to, but the investment our future prosperity depends on.
“I hugely welcome the pensions industry decision to invest in more productive assets, from growing companies to infrastructure. This supports better outcomes for savers and faster growth for Britain.”
What does it mean for my pension?
It is important to understand here how this shift in investment activity will affect your pension pots.
The agreement will impact pension provider ‘default funds’. These funds are general purpose long-term investment funds designed to meet most pension member needs. However, they are not tailored to individual circumstances, making them sometimes unsuitable to the circumstances of the member.
Anyone with a workplace pension provided by one of the financial firms in the agreement could see their savings directed toward such projects.
Concerns have been raised about the suitability of such investments. This is because on one side they might expose pension members to excessive risk, but they might also offer inferior returns.
One of the key reasons the Government is pushing pensions toward more UK investments is because they have for some time now been relatively ‘unloved’ by wider markets. This is not because they’re missing an opportunity – rather pension funds have chosen to avoid the UK because investment returns abroad have been seen as more lucrative – and thus better for members.
By mandating more UK investment, the Government is risking returning to a strategy dubbed ‘financial repression’. This is a practice that forces capital to remain locally invested, but it can be deleterious to long-term outcomes thanks to lower quality relative domestic investment opportunities and levels of inflation. It is a practice that was more or less overt in the post-World-War-II era but was largely abolished by the 1970s.
That being said, there is no indication pensions are going to be forced into UK-based investments just yet. But it is clear the pressure is rising from the Government to encourage more capital to stay onshore.
Should I do anything?
For those who are considering how this could affect their long-term financial plans, it is important to review where pension pots are invested and if there are any over-exposures to certain sectors or asset classes.
However, before making rash investment changes it is important to speak to a professional financial planner in order to ensure that your portfolio has the best opportunity possible for growth and income.
While the Mansion House Accord is potentially good news for the UK, the benefits for pension members are as of yet unclear. It is essential your plans are given the best opportunity for success with this in mind.