A year ago this week, Jeremy Hunt was hailing victory in the Square Mile. The former-Chancellor and then-Lord Mayor of London, Nicholas Lyons, had just corralled ten of the UK’s top pension managers into signing an agreement they described as a “historic turning point” for investment in the UK.
The Mansion House Compact, as it was dubbed, drawn up at the historic home of the City of London Corporation, committed some of the largest pension managers in the UK to “allocate at least five per cent of their funds to unlisted equities by 2030”.
It was a deal that promised to plug a huge funding gap in the UK and go some way to solving the malaise that has forced so many of Britain’s most promising start-ups overseas.
One year on, and much has changed in some respects. Hunt has been booted out of government and Lyons has moved out of Mansion House into his old role as chair of Phoenix Group, after the end of his one-year term as Lord Mayor. Last month, he was made a knight of the realm for his services to the City over a long and illustrious career.
But in unlocking investment, change has been more glacial.
A week after the deal was announced, a group of around 100 venture capital investors penned a corresponding agreement to welcome the flood of pension money into their own funds. However, the two groups have had little practical engagement with each other since then, according to City sources.
Asked by City A.M. earlier this year whether the agreement would actually yield the promised five per cent, the boss of the British Venture Capital Association’s ‘Expert Panel’, tasked with driving the agenda, was decidedly uncertain.
“Am I confident? I am confident that we will produce the ways and the structures and the ability for the pension houses and everybody to choose and be able to invest in this asset class if it’s right for their members,” Kerry Baldwin said.
Meanwhile, plans for the British Business Bank to launch a vehicle to funnel cash from pension funds into growth technology companies have been unsettled by the early election. An original timeline to submit plans to the regulator in July has been kicked back until at least the Autumn to give the new business secretary, Johnathan Reynolds, time to feed into and sign off on the scheme, City A.M. understands.
In a parallel universe, Hunt would have been talking up the compact’s progress at the opulent Mansion House dinner this week, but instead his replacement is settling into the Treasury and a date for the dinner is yet to be set.
So what comes next for the industry’s grand investment plans?
In the absence of the City’s annual summit, City A.M. can reveal that Sir Nicholas will this Thursday gather the signatories of the compact including Aviva, L&G and Scottish Widows, alongside the City of London Corporation, the Association of British Insurers and the British Venture Capital Association, to collectively assess its progress and map out its next steps.
“What is important at this meeting is to make sure we’re all at the same point and understand what’s going on, and then can take that to ministers going forward,” Michael Moore, chief executive of the British Venture Capital Association, tells City A.M.
“What we’re using Thursday for is [to discuss] how much progress we are making and what we can do going forward,” he adds.
For Rachel Reeves and the government, their growing to-do list may get slightly longer as the group lays out a list of demands to get the plans up and running.
Central to their concerns is likely to be the issue of cost. The higher charges associated with investing in private, unlisted assets have typically been a roadblock to pension money flowing into the private markets. Lifting fees for savers that are already invested in certain schemes is proving a tricky obstacle for pension managers to work around.
Alongside that is the arguably more troubling issue of scale and the inherent risks of the private markets, which have unsettled the traditionally staid and conservative pension industry. While politicians so often point to Canada and its behemoth funds as a model of success in backing growth companies, schemes like the Ontario Teachers Pension Plan, which manages around $247bn, dwarf their UK peers and allow for a diversified but still meaningful commitment to backing start-ups.
“They’re a good model in many ways, but you can’t shortcut your way to what they’re doing at that kind of scale,” Dan Mikulskis, chief investment officer of the £28bn People’s Pension, tells City A.M.
“You need to actually work through it. I think there is a little bit of a worry that you’re almost trying to force people to run before they can walk, and then it’s going to be sub-optimal,” he adds.
While some of those obstacles can be ironed out by the industry, scale and consolidation will ultimately be a task for Reeves. Her predecessor, Hunt, set in train a number of schemes which could provide a potential solution, including transforming the industry’s ‘lifeboat’, the Pension Protection Fund, into a vehicle to absorb and consolidate underperforming schemes.
Reeves has also been bolshy in the past with threats to force pension funds into backing unlisted assets. In an inaugural speech to business leaders yesterday, she was clear that pension cash would be at the heart of her investment plans, saying the government will “turn [its] attention to the pensions system, to drive investment in homegrown businesses and deliver greater returns to pension savers”.
However, it was unclear how she intends to do that and levers she will pull to get the cash glowing. The Treasury did not respond to a request for comment yesterday.
One year on, and progress in unlocking pension cash to flow into start-ups has been minimal. The City is calling for something that may be familiar to Reeves and Starmer over the past few weeks: change.