There will be a problem with sourcing assets for the UK government’s Mansion House reforms, LGIM head of multi-asset funds, John Roe, has said.

Speaking during a panel session at the PLSA Annual Conference 2023 yesterday, 18 October, Roe about the government’s Mansion House reforms, Roe said: “I do think there will be a problem with sourcing the assets, I think that will be a real challenge.”

The Chancellor, Jeremy Hunt, announced the Mansion House reforms in July, in which nine of the UK’s largest DC providers, including L&G, have committed to allocating 5 per cent of assets in their default funds to unlisted equities by 2030.

In terms of the types of assets, Roe noted that feedback from trustees is that with such investments they want a high return, which tends to limit the amount invested in debt. “It tends to lead to more equity investment, to more in areas like venture capital.”

He also said that LGIM CEO, Sir Nigel Wilson, has been a “big advocate” for trying to find ways to invest in the UK economy for over a decade.

In terms of the ability to allocate 5 per cent to private equity another panel member, IGG head of sustainability, Tegs Harding, said she doesn’t see it being achievable on “day one”.

“That said, there will be an allocation to private equity, it will be sizeable, it will be global with a UK bias, and we are looking for opportunities to make this capital useful, productive in the broader sense of the word. It will very much be consistent with the spirit of it, will it be to the letter of what they’re asking for, very unlikely.”

She also highlighted that fund structure will play an important part, that the funds being designed are open ended. “We need to be able to build scale quickly but also think about how those projects will give back money overtime, so it needs to work from a technical perspective.”

In addition, LGIM interim head of DC investment, Jesal Mistry, who also spoke on the panel, stressed that it is key investments are made in the interests of the members.

“The key bit here is that you do things in the right way for the right reasons…. How we then go about implementing that over the next 10 years, I think, will be the critical bit, and as Tegs and John said, taking account of the opportunities out there and doing so in the right way, whether that’s the UK or other unlisted equity, but we will be working in that direction. It’s very much about it’s only if it’s in the interest of members to do so that it’s worth doing.”

However, Mistry also noted that the industry must accept that a higher fee will be needed for such investments.

“Within a commercial master trust, we’ve been pushed right down to the lowest point in terms of charges, and there doesn’t seem to be a lot of headroom within that. To get to the allocations of 30 per cent or around that mark will require a lot of movement within the industry to be able to accept those charges for members… It will be over time.”

Furthermore, Harding highlighted opportunities for illiquids in the decumulation phase of DC pensions, if “structural barriers” can be overcome.

“A lot of the discussion, rightly at the moment, is how do we fit illiquids in the growth phase of their [DC] journeys. People are going to retire though with perhaps 20 or 30 years still to go and illiquids could play a really important role post-retirement, but there are a number of structural barriers at the moment that means we just can’t do that.

“People need to be able to consolidate their pots into one place so you can do some kind of drawdown or that kind of post-retirement solution, which could include illiquids. But until you get that consolidation right, until you have much more knowledge about how much wealth your members have in aggregate and when they are likely to need that money, you can’t begin to look at that post-retirement solution but I think it is something that we’re going to have to start looking at.”

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