Rory Murphy, former chair of trustees at the Merchant Navy Officers’ Pension Fund, argues that trustees should take a proactive approach to investment decisions and not be led by advisers.
Reaction to the Mansion House Accord, aimed at boosting investment by pension funds in UK private markets, has been broadly positive, and in some cases enthusiastic.
Certainly, the government is in no doubt about the potential benefits, both to pension funds and their members and to the broader UK economy. And since this initiative builds on a similar idea originally proposed by the previous government, there seems to be (unusually) a degree of political consensus.
And 17 of the country’s larger pension providers have signed the accord, so they’re obviously on board.
UK private markets are beginning to look like a more compelling option for pension schemes, with a strong pipeline of private investment opportunities. Successful exits from UK companies by private equity funds jumped 48% between 2022-23 and 2023-24, according to MCAM Group.
As pensions minister Torsten Bell has pointed out, there’s a reason Canadian and Australian pension funds are opening offices in London.
Yet when it comes to increasing their allocation to domestic markets in general and private markets in particular, the bulk of UK pension funds seem at best reluctant, and at worst, in the words of one expert, “incredibly inactive”.
Overseas pension funds are far more heavily invested in their own domestic equities. In Australia, the average domestic equity allocation is 37%, while in the US it’s a whopping 63.5%, according to the Capital Markets Industry Taskforce. Both are hugely overweight compared with the MSCI index. In the UK, though, the figure is only 2.8%, way below the MSCI index.
So why are UK pension trustees dragging their feet?
Trustees could be taking a more proactive, innovative approach and leading government policy, not being reluctantly dragged along by it.
Some have pointed to questions about trust law and whether fiduciary duty allows trustees to refocus investment strategy in this way - though such concerns don’t appear to have restrained the trustees of the Universities Superannuation Scheme (USS), for instance.
It’s perhaps worth noting that larger funds with specialist in-house investment teams, including USS, have been more willing to explore private market investments.
Others are more reliant on investment consultants and remain largely uncommitted, despite growing surpluses. This brings us to a problem that has blighted the pensions sector for years, and not just in relation to investment management. Namely, the failure of trustees to question advice or to direct advisers.
Time for trustees to take back control
Pension funds should be run by their trustees. But in this area, as in others, many of the key decisions seem to originate with advisers before being signed off by trustees.
Very often, ‘do nothing’ is seen as the safest option. The default setting for many pension trustees, with the full backing of their advisers, seems to be inertia.
It’s hardly surprising that, while some in the industry may throw up their hands in alarm at the prospect of ‘mandation’, the government seems willing to go down that route if necessary.
One option might be the idea proposed by former pensions minister Ros Altmann, who has suggested that pension tax relief should be dependent on compliance with UK investment targets.
The government shouldn’t feel the need to consider compulsion. Trustees should be assiduous in devising their own investment strategies and telling their advisers to implement them on behalf of their members.
Rather than timidly handing over key decisions (along with chunky fees) to consultants and other advisers, trustees could be taking a more proactive, innovative approach and leading government policy, not being reluctantly dragged along by it.
It’s time for trustees to step up and grab this opportunity on behalf of their members, enabling them to share the rewards that might otherwise be enjoyed by Australian or Canadian pension funds.
Rory Murphy is an independent trustee and consultant and the former chair of the Merchant Navy Officers’ Pension Fund.
