The Garrulous Jay – The £75 Billion Win-Win-Win

On the 10th July most of the UK’s media was facing west in the direction of Windsor, where Prince Charles was chowing down with President Biden. Had they turned their gaze eastwards to the City they might have witnessed Jeremy Hunt’s first Mansion House speech. In it the Chancellor proposed a series of potentially profound reforms he believes could lead to a transformational ‘triple win’ for the UK. But is he right?

Many of the Mansion House Reforms 2023 proposed in Mr Hunt’s speech relate to the UK pensions industry, and encouraging it to invest more in private companies. He pointed out that in the UK defined contribution (DC) pension schemes invest just 1% of their assets in unlisted equity, compared to 5-6% in Australia. Strewth!

He went on to announce that he has persuaded a ‘Mansion House Compact’ of leading pension fund managers to increase their private company investments to 5% “of their default funds” by 2030, claiming that if the rest of the UK’s DC market were to follow suit that would amount to a £50 billion investment boost for high growth UK businesses.

At the same time, Hunt set a goal of doubling the local government pension schemes’ allocation to private equity to 10%, potentially unlocking a further £25 billion by 2030.

The result? “For an average earner who starts saving at 18, these measures could increase the size of their pension pot by 12% over their career – that’s worth over £1,000 more a year in retirement.”

In other words, the Chancellor has identified a win-win-win in which pension savers, high-growth British businesses and the UK economy all benefit.

I applaud the ambition of Mr Hunt’s reforms, but I think they need to be treated with caution.

The data does suggest that UK pension funds have been more risk averse than some of their overseas equivalents, and that this may have held back private enterprise in the UK. But I question whether these reforms will be that transformative.

For a start £75 billion sounds like a big number, but is it? Note that it’s “by 2030” which presumably means it’s cumulative over the next 6-7 years. Furthermore, it assumes the rest of the UK’s DC market follows in the footsteps of the Compact, but will it? Non-Compact funds are likely to be smaller, and smaller funds may be more cautious.

Estimates for the size of the total UK pensions market vary, but the figure is around £2.4-2.9 trillion. That implies that the total £75 billion will still be less than 3% of total UK pension fund assets. I confess I’ve not run the numbers, but to me this makes the projected benefit “for an average earner who starts saving at 18” look pretty heroic: it involves so many assumptions it’s basically meaningless.

The Chancellor’s reforms evidence a laudable vision, but to succeed in the way he hopes will in my opinion require more than just a modest increase in investment by part of the UK pensions industry.