Will this new initiative boost your workplace pension?

Millions of pension savers have woken up to the news that workplace pensions will funnel at least 5% of their retirement pots into UK start-ups and infrastructure in five years’ time.

Under the voluntary initiative, dubbed the Mansion House Accord, seventeen of the UK's biggest pension schemes have pledged to invest at least 10% of their defined contribution (DC) default funds in private markets by 2030, with half of this weighted to high-growth domestic businesses.

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Firms to sign up include household names such as Aegon UK, Aon, Aviva, Legal & General, NatWest Cushon, Nest, and Royal London.

So, what’s the aim here and what does it mean for you?

Let’s start with the goal, which is two-fold: first, the government believes that investing more in private assets (companies that don’t trade on the major financial exchanges) will increase savers’ returns, leading to better retirement outcomes.

With DC pensions, your eventual savings are determined by how much you save and how your investments perform. The Accord seeks to improve the latter. More on whether that will come to pass further down.

The second aim is that with more money flowing into domestic businesses, a lethargic UK economy is set to receive a much needed £50 billion shot in the arm.

Chancellor of the Exchequer, Rachel Reeves, has had her say, warmly welcoming the idea; no surprise given it chimes with phase one of the government’s landmark pension review, launched last year just after Labour won power. The review seeks to explore “new ways to boost investment, increasing saver returns and tackling waste in the pensions system.”

In response to Accord, Reeves said: “Through our Plan for Change, we are choosing to back British businesses and British workers. I welcome this bold step by some of our biggest pension funds, which will unlock billions for major infrastructure, clean energy, and exciting startups — delivering growth, boosting pension pots, and giving working people greater security in retirement.”

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Other key ministers have also voiced approval. Torsten Bell, who took the baton from Emma Reynolds earlier this year to assume the role of Minister for Pensions, said: “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.”

Critics of the government’s push to shift workplace pension weightings to UK assets argue whether savers truly stand to benefit. Pension schemes have a fiduciary duty to put members’ needs first, seeking to deliver the best possible outcomes, and as such face no geographical restrictions. There are concerns that allocating a minimum percentage of default funds - which most savers tend to opt for - to the UK could damage rather than boost returns.

But Yvonne Braun, Director of Policy, Long-Term Savings, Health and Protection at the ABI, stressed: “Investments under the Accord will always be made in savers’ best interests. It is now critical that Government supports the industry’s ambition, by facilitating a pipeline of suitable investment opportunities, tackling barriers to investments, and delivering wider pension reforms effectively."

Will it actually deliver better outcomes for savers?

This is the big question and one that, in absence of a crystal ball, is impossible to answer.

A report published earlier this year by the Department for Work and Pensions (DWP) titled, Pension fund investment and the UK economy, crunched the numbers to forecast the potential impact of allocating more pension assets to private markets.

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Government actuaries modelled three outcomes (low, medium and high) for four strategies, which were:

• Baseline: asset allocations remain similar to current levels in the DC Market - 70% allocation to overseas equities.
• UK Equity focussed: overseas equity allocations are reduced from 70% to 50% and reallocated to UK equities
• UK “Balanced” focussed: Overseas equity allocations are reduced and reallocated across a diverse range of assets including UK equities and private markets
• Private Markets: Overseas equity allocations are reduced and reallocated to private markets

Needless to say, the results (shown below) don't provide the most persuasive of arguments, and challenge the assertion that savers will see material improvements.

Compared to a baseline scenario, increasing allocations to private markets is only expected to deliver a 2% boost to a saver’s pot. While we should note that anything that uplifts savers outcomes, however marginal, should be welcomed, there’s a risk the advantages are being oversold. The past may indicate that private assets can offer improved prospects for investment growth over the long term, but there is of course no guarantee this will play out in the future.

What action do you need to take in response?

To be clear, this will impact your workplace pension and not any private DC  savings, such as a self-invested personal pension (SIPP). With SIPPs you will retain the carte blanche to invest your money however you please.

As the regime isn’t due to take effect until 2030, there’s nothing to do straightaway. It does, however, offer a useful reminder to check that your workplace pension is invested in the right things for you. Choosing the most suitable assets based on your personal risk appetite and retirement goals is crucial.

Furthermore, this won’t impact all funds, only default ones. If you would still prefer to say, swerve the UK and invest your workplace pension savings globally, check what other funds your scheme offers. Fund choices for workplace pensions vary wildly: some offer a handful, while others have thousands to pick from.

If the event returns are better, the key determinant is time. In other words, you more you have on your side until retirement, the more you'll gain.

What about defined benefit schemes?

The Mansion House Accord will only impact DC schemes, but changes to the defined benefit (DB) landscape are also in train. DB schemes guarantee a lifelong, inflation-linked income in retirement, based on your number of years services and your final or career-average salary.

In late-January, Prime Minister Keir Starmer announced plans to allow DB schemes to unlock £160 billion in surplus assets and either direct it into the UK economy or boost members’ pensions. This underscores that alongside its DC ‘megafunds’ proposal, the government views the wider workplace pension regime as a key lever to pull to supercharge economic growth on these shores.

But again, this raises questions about the need for schemes to always put their members’ interests front and centre. Ultimately, each DB scheme will have to weigh up whether taking more risk by investing any surplus in fast-growing companies is a prudent thing to do. DB pensions provide valuable, iron-clad promises and investing and managing scheme assets prudently is essential to keeping these.

Altmann’s radical upfront tax relief idea

Former pensions minister, Baroness Ros Altmann, is no stranger to controversial takes.

Her latest suggestion is to restrict upfront pension tax relief to those who invest 25% of new contributions in UK assets as a “quid pro quo”.

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Such as proposal obviously extreme. Not only is 25% a significant allocation, but governments must stop meddling with the pension tax regime. The constant moving of the goalposts risk disincentivising savers at a time when engagement is so important.

While the odds of Altmann’s proposal being taken on board is slim to none, it does provide a further example of the push to get more pension money flowing into UK businesses. And this theme is likely to gain further pace during both the current and future parliaments, whoever is in power.