UK Pensions into private markets and the Mansion House Accord

A pension member perspective

CFA UK recently published a new report which looks at UK pensions’ intention to increase their participation in private markets (the Mansion House Accord) from an end investor perspective, you can read the full report here.  

The full report offers recommendations, and insights that could help in making this initiative a success.  By learning from international best practices, UK schemes can improve returns and diversification for their members while exercising caution in investment selection and assessment. 

Report Summary:

The UK Government is actively encouraging pension funds to increase their allocation to private markets as a means of stimulating economic growth. An example of this initiative is the Mansion House Accord, which established a 10% target for default Defined Contribution (DC) assets. If implemented with diligence, an increased investment in private assets offers the potential for improved risk-adjusted returns and enhanced diversification over the long term for pension scheme members. The report includes a brief modelling of returns and references to other sources of risk and return metrics to support this conclusion. However, achieving these benefits requires a robust investment process, sound governance, and in-depth expertise—especially given the considerable dispersion in performance across various private asset classes.  

Lessons from abroad: Insights from private market pioneers There are valuable lessons the UK can draw from pension powerhouses such as the Netherlands, Canada, and Australia. 

Dutch pension funds have established a strong track record in private market investing. Their success is largely attributable to rigorous governance, active member engagement, and collaborative efforts to build specialist expertise. Notably, they have found that achieving cost savings is more dependent on operational efficiency than on the scale of the fund alone. 

Canada has been a pioneer in direct investments in infrastructure and private equity. While large pension schemes benefit from in-house teams and an innovative culture, smaller funds often face challenges related to governance and resources. This underscores the need for ongoing capability development within the sector. 

Australia distinguishes itself by offering members greater choice through mandated contributions and higher allocations to private assets. The existence of a robust domestic deal pipeline and competitive market dynamics have worked in their favour.  

Overcoming hurdles: Paving the way for private market success

For UK pension schemes to succeed in the private market arena, several challenges must be addressed. Key areas for action include modernising trading infrastructure, adapting cost and charge frameworks, enhancing liquidity risk management, and creating investable opportunities, particularly in sectors such as real estate, infrastructure, and technology. 

Consolidation of funds can potentially open doors to private deals and reduce costs. However, any such initiatives must be accompanied by strategic governance and the development of robust in-house capabilities to ensure that the benefits are passed on to members. 

Policymakers and industry leaders play a vital role in this process. By ensuring regulatory stability, pioneering innovative fund structures, and developing a sustainable project pipeline, they can create an environment in which pension funds can engage in private markets with confidence. 

Conclusion: Charting the course for UK pension funds 

UK pension schemes have an opportunity to deliver diversified and risk-adjusted returns by responsibly increasing their exposure to private markets. Global experience underscores that transparency, member engagement, and continuous development of capabilities are fundamental to achieving success in the private asset space.