On 10 July 2023, Chancellor Jeremy Hunt announced an ambitious initiative designed to encourage pension schemes to invest in unlisted equities. In addition to proposed regulatory changes to scheme governance and the management of defined benefit (DB) schemes, Hunt sought to persuade the UK’s defined contribution (DC) and Local Government pension schemes (LGPS) to invest £75 billion in new companies.
He argued that the returns from such investments would increase the average DC pot by as much as £12,000 at the point of decumulation. A new value-for-money framework was introduced to emphasise that value for DC investments should focus on long-term returns rather than simply be based on management costs.
At first sight, such changes might seem obviously beneficial for DC scheme members. However, it is necessary to take a nuanced view of Hunt’s proposals to determine their impact in their entirety.
The trustees’ statement of investment principles requires trustees to formally set out their policy concerning the types of assets they intend to hold, their investment objectives and their attitude to risk. Investment in unlisted equities would require trustees to rethink their existing policy to expose members to a higher level of risk, and potentially higher management charges, in order to pursue higher returns. This would be crucially important in the context of changes to the design of the default fund, as up to 95% of members would be using it. Trustees would need to be persuaded that such changes would be in members’ best interests, and those with a more risk-averse philosophy may be disgruntled when making such a change.
The Mansion House reforms have the potential to offer members higher returns over a career-long time horizon, but do so at the cost of higher management charges and greater exposure to investment risk. It is important that those making critical decisions have a full appreciation of both sides of the investment coin.
Tim Middleton is director of policy and external affairs at the Pensions Management Institute
