The issue of mandation – the controversial idea where the government forces pension funds to invest a certain share of their assets in specific UK assets or sectors – was a key point of debate at portfolio institutional’s private markets conference.
The politics of mandation struck a chord, in a panel to discuss defined contribution (DC) pensions and Mansion House.
Chair of the panel, Alan Pickering, noted how different politicians over many decades have wanted to use capital from pension funds for a wider UK plc purpose. The otherwise unconnected quartet were cited as Tony Benn, Nigel Lawson, Jeremy Hunt and now Rachel Reeves.
This historical precedent brought particular ire from Philip Dawes, head of distribution at BNP Paribas Asset Management. “Successive governments have used DB and DC pensions as a political football, and I don’t think that is in the members interest, whether they be DB or DC,” he said.
That said, he added: “I am a huge advocate of private markets and its inclusion in portfolios makes a huge amount of sense.”
But returning to his unease, he said: “I am quite uncomfortable with DC in particular being used to fund things like venture capital and private equity in the UK. I worry that DC investors are being forced into the higher end of the market.”
Dawes is also concerned about another aspect of this argument. “I worry about the focus on the UK versus global. I think for DC members, unconstrained portfolios perform better in private markets, and that means going global. It means multi-currency,” he said.
Investment goal
Rachel Farrell, director of public and private markets at Nest, weighed up the mandation issue, before reaching a similar conclusion. “The government has a particular goal which is to try and stimulate economic growth in the United Kingdom, which is a great goal, and certainly helps our members,” she said.
On the other hand, she added: “The government could provide more clarity on how to address performance fees and the J-curve effect, which are typical of closed-end private market funds, as both are problematic in ensuring member fairness. This problem is not specific to UK investments.”
Therefore, Farrell concluded: “Mandating exposure to the UK could be problematic because we need to always invest in the best interest of members. Mandating UK investing could compromise this focus.”
Mandation agenda
The issue of mandation is very much on the agenda, in part, because of the Mansion House Compact, introduced by the then Conservative chancellor Jeremy Hunt, who in the Summer of 2023 announced a raft of reforms designed to ensure that pension scheme capital is used more productively, chiefly via investment in high-growth companies.
With this in mind, Hunt solidified the initiative for DC pensions to voluntary allocate 5% of their assets to unlisted equities by 2030.
This baton has been enthusiastically taken up by the current chancellor Rachel Reeves, and the issue of mandation has hung over the whole debate, with the government not fully ruling it out as an option.
In a similar way to other speakers, Euan Miller, managing director of West Yorkshire Pension Fund, in a fireside chat, said: “There are many rumours around mandation, but we are yet to see anything concrete. Pension committee members do not like being told what to do in my experience.”
Miller also highlighted the conflicting nature of some of the arguments. “There is a kind of inconsistency. On the one hand we are told there are lots of great businesses who would drive the UK economy forward if they had more capital, but on the other hand, private equity managers have lots of dry powder. Something doesn’t quite add up there,” he said.
“It is probably more a case of allocations to private equity are not finding their way to these businesses,” Miller said. “It is not necessarily institutional investors like pensions funds not committing to the asset class.”
And Miller added that there are possible unintended consequences from a mandation outcome. “If private equity managers are not allocating to these businesses, then requesting all pension funds to hold 10% or more in private equity is more likely to drive valuations up and drive returns down than help these British businesses.
“So I do not see it as a great panacea for UK economic growth. The industry, in general, is not in favour of mandation,” he said.
The pensions industry now awaits the government’s final position on mandation with an element of anticipation but also trepidation.
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