Mansion House Compact

There is a significant shortfall and inherent risk in UK pensions which needs to be addressed.

We need to act now to avoid a crisis that will affect the basic needs of individuals in their retirement years. Auto Enrolment has transformed pension savings in the UK but there is a significant risk individuals will not achieve their desired income in retirement.  

The Lord Mayor has said that “Britain cannot escape the dire reality around our pension fund returns. According to a 2022 industry survey, only 14% of defined contribution (DC) pension scheme members believe they are on track for a retirement income that maintains their current standard of living in retirement".

One in five pensioners are already living in relative poverty in the UK, according to the Centre for Better Ageing. In a 2022 industry survey, only 14% of defined contribution (DC) pension scheme members believed they are on track for a retirement income that maintains their current standard of living in retirement.

A 2015 report from the World Economic Forum reveals a daunting retirement gap, projected to reach £25 trillion. To reverse this alarming projection, cross-party interest has emerged, fostering initiatives that align with our shared vision: better returns for pension holders, flourishing British businesses, and collective growth in the UK economy.

The limitations of defined contribution pension savings, including low contributions and mediocre net returns, exacerbate the problem. At a time when increasing contributions may be a challenge or completely out of the question for many, we need to focus on how returns can be improved. 

Currently just 0.5% of UK DC pension assets are invested in unlisted UK equities meaning scheme members are not able to benefit from the potential returns arising from investment in these high growth companies.

Providing access to unlisted equities, comprising venture capital and growth equity, could significantly enhance returns over the life of a policy. Even a modest allocation to unlisted equities can provide investment gains traditionally enjoyed only by the wealthy and well-informed.

The Mansion House Compact

As highlighted in the recently published ‘Powerful Pensions: Unlocking DC capital for UK tech growth’ report, collective action from pension industry participants and a supportive public policy framework is required to allow institutional investors, especially DC pension schemes, to effectively invest in unlisted equities and other equity-like private capital.

If DC pensions allocated 5% of default pension allocations to unlisted equity this could, over time, amount to £50bn to be invested in UK growth companies.  

This allocation would be a win-win for UK savers and growth companies.  The savers would benefit from exposure to an asset class with the potential for higher returns over the longer term.   It would give millions of people a modest but meaningful stake, democratising returns, and give everyone a role in creating the UK’s most innovative companies of the future. 

The growth companies would benefit by having more access to institutional capital. And UK plc would benefit by having a more vibrant growth company ecosystem. By channelling this investment we can create growth and in turn support jobs and prosperity across the whole of the UK. 

Over the past few months, the City of London Corporation has helped convene a core group of pension providers to create a Compact.

The Compact is an expression of intent, on a voluntary basis to take action to achieve better outcomes for UK long-term savers including the commitment:

• to increase the proportion of UK pension and other relevant assets, including DC default funds, invested in unlisted equities
• to the objective to allocate at least 5% of DC default funds to unlisted equities by 2030 in a way that is consistent with the requirement to act in the best interests of our savers.

Further details on this initiative can be found in the Frequently Asked Questions. 

Industry are very supportive of this initiative, with endorsements from many organisations.

Additionally, His Majesty's Treasury supports this initiative as referenced by the Chancellor in his Mansion house speech.

We would like to thank EY for their support in acting as secretariat to convene industry, providing external analysis, and a continuation of their activity from authoring the Powerful Pensions report.

We would also like to thank Allen & Overy for their legal input and support