Mercer: Pension funds need better pick of UK investments for key deal to work
The government’s proposed pensions deal will not boost growth unless better UK investment opportunities are put on offer, the boss of one of Britain’s biggest funds has warned.
In an interview with Morning Wire, Benoit Hudon suggested a stronger pipeline of UK assets was needed as current options did not deliver good enough returns for savers.
The Labour government is poised to set a target for pension funds to invest five per cent of their assets in domestic projects by 2030 under a new agreement dubbed ‘Mansion House Compact II’.
The Mercer UK chief executive, who manages assets worth £648bn, called on Chancellor Reeves to roll out a clearer strategy on projects it wishes to deliver as a strong selection of assets was a “precondition” for the new agreement to work.
“Our view is there simply isn’t a pipeline at the minute to drive good returns for members that are equal or better opportunities available elsewhere when you get to that sort of scale,” Hudon told Morning Wire.
He suggested pension funds needed to be given more time for investments in private capital to be built up as he said there was a “lot of work to be done” on making UK investment opportunities more attractive.
“It all starts from where does the UK want to go,” he said. “Where does the government want to deploy assets?”
“Is it green farms, trains, transport, defence – what is it? It’s not for us to decide that. It’s for the government to decide what kind of infrastructure or projects they want to prioritize.”
Tax incentives would bring ‘healthy pipeline’
He also urged the government to introduce tax incentives to relieve some of the costs of investing in the UK and in turn generate higher returns.
The Pensions and Lifetime Savings Association (PLSA) has led calls for the government to reverse a key Gordon Brown-era policy that removed tax credits on dividend payments made by pension funds on UK share purchases.
Hudon said its re-introduction could be effective at drawing investment into the UK alongside closer agreements that see the government reward investment in infrastructure projects at home.
The Mercer UK boss formerly advised the Canadian government on its pension reforms, which is often cited as a point of reference for Chancellor Reeves.
He said the UK government would do well to follow examples in Canada and Australia where mandates on investment levels in local infrastructure are not set.
“As much as we believe that it’s a good thing to promote investments in the local economy and to use the capital – the trillions invested in pension funds in the UK – to drive the economy forward, mandation risks coming in the way of delivering the intended outcome [for savers],” he said.
“The best way to get the commitment is providing the right incentives through a good, healthy pipeline of opportunities, combined potentially with tax incentives.”
Pensions minister Torsten Bell said that the government was working to expand the “supply of investable proposition” in a speech in early March.
The government is also set to unveil its industrial strategy in June, which will lay out a ten-year growth blueprint for the UK economy.
Morning Wire understands that business reforms suggested by Mercer, the PLSA and a number of other organisations are not set to be a part of the new agreement. Meetings between pension funds and government officials have been described as “tense”.
Pension reforms loom
Hudon’s comments put extra pressure on the government to deliver feasible solutions to expanding UK infrastructure projects as pension fund managers fear their commitment to boosting savers’ returns could be at risk of not being fulfilled.
The current Mansion House proposal, which could be announced as early as next Tuesday, will not mandate pension funds to invest five per cent of assets in UK-based funds, according to industry sources.
But industry executives fear the government may use “naming and shaming” tactics to force through investments, the Financial Times reported on Tuesday.
Phoenix Group chairman Sir Nicholas Lyons, who was one of the architects of the first Mansion House Compact, suggested at an event on Tuesday that the private sector should be left to “make the right decisions” about investments.
He added that the government should be able to “retain the threat of mandation” to encourage funds to plough more cash into local assets.
Over a dozen pension funds are expected to sign up to the deal due to a lower bar to join. The last pact , introduced under former Chancellor Jeremy Hunt in July 2023, drew 11 signatories as funds committed to invest at least five per cent of their funds in private markets by the end of the decade. The new deal will raise that target to ten per cent, half of which will be devoted to the UK.
But it has been suggested that one or more of the original signatories could drop out. Aviva, Nest, Scottish Widows, Aegon and NatWest Cushon have not commented on whether they rule out a withdrawal from the pact.
Cushon signed up to the deal in late December and it was among a group of pension providers, which included Aegon, that committed to investing significant funds in UK companies at the end of last year alongside the state-owned British Business Bank.
Aviva, meanwhile, launched a venture capital arm in September last year in response to the “UK’s supportive policy environment, which is epitomised by the Mansion House Compact”, as put by Aviva Investors boss Mark Versey.
The Treasury and Department for Work and Pensions is also reviewing several other reforms ahead of the introduction of the Pension Schemes Bill.
Among those changes include the expansion of so-called pension ‘mega funds’ that accelerate consolidation of various pots.
Critics of the plans believe members’ savings could be threatened.