Mansion House pension reforms raise new communication challenges for industry - and private equity in particular

14 July 2023 (London)

Jeremy Hunt’s Mansion House speech this week was deliberately framed as an exercise in unlocking benefits to savers. The Chancellor presented a raft of fairly technical reforms to pension policy and regulation as something that will make future retirees better off than they would otherwise have been, several decades from now. 

That’s a challenging bit of communications work, and not primarily because of the (optimistic?) assumptions used in the Treasury’s modelling of increased returns on pension investments arising from policy change. 

The big comms challenge around that appeal comes from the timeframe.  Human beings are generally bad at thinking about the future: we are creatures of the present, disinclined to put enough value on things that haven’t happened yet. So telling people that you’re going to make them better off in a retirement that they can barely imagine might have only limited power. 

This is one reason why pensions and pensions policy are hard to sell to the wider public.  (Complexity is the other big reason, of course.)

That human inclination towards the here and now points towards some significant communication challenges for many of the organisations invoked in those Mansion House reforms. Pension funds and private equity firms are both going to face increased scrutiny as a result of those reforms. Both need to be ready to do a better job of explaining themselves and their actions to savers, the wider public and the politicians who speak for them.  

I base this conclusion on the central themes of the Mansion House agenda: higher returns, delivered by higher risk and higher fees.

That agenda is perfectly respectable.  There is a legitimate case to be made that at least some pension savers’ money (especially younger ones) should be moved towards asset classes that have historically delivered higher returns, while bearing greater risk.   These include - but are not confined to - private equity. The Chancellor suggested, for instance, that 10% of Local Government Pension Scheme funds should be in PE.  The Mansion House Compact meanwhile suggests that bit Defined Contribution pension operators should seek to have 5% of default funds in unlisted equities by 2030. 

Associated with this move towards higher-return, higher-risk asset classes is a potential change in fees paid to the managers of those assets.  In much pension provision, especially that which arises from automatic enrolment, a guiding principle has been to minimise costs for savers. Policymakers decided that keeping costs down to the lowest possible levels was necessary not just to avoid savings being eroded by cumulative charges but also to maintain public confidence in pensions. Reports - and perceptions - of unreasonably high fees are corrosive of trust.

A key theme of the Mansion House package is a “shift from cost to value”.  Policymakers now worry that minimising costs has made it harder for pension savings to go into some asset classes, meaning returns are lower than they might otherwise be. 

The logical outcome of Mansion House, therefore is higher fees.  Of course, it does not automatically follow that savers will pay those elevated fees. It is possible that pension firms will absorb those costs and accept lower margins. But where that does not happen, the takeaway from Mansion House for ordinary pension savers is this: more of your money is today going to be given to fund managers (including private equity bosses) for putting your savings into riskier things that might make you better off tomorrow. Oh, and some of those investments might fail too.

Put very simply, the public is being offered possible gain tomorrow (returns) vs certain pain today (fees). Given that human failure to value the future, the Mansion House package - even if it is sensible policy that unlocks higher returns in the long term - will actually increase the challenge faced by pension policymakers and industry participants in communicating what they do to savers and voters. Long-term benefits rarely make headlines or fuel social media conversation. Short-term costs do.

The involvement of the PE industry here only deepens the challenge. PE is poorly understood and little loved beyond its own sector. The Chancellor and others have - quite reasonably - looked beyond that reputational issue to the sector’s record on returns.  Consequently they are placing a quite significant bet on the sector to go on delivering those returns in future - a future where interest rates are higher and questions abound about valuations.

Today, the Mansion House reforms are landing well with the small number of informed stakeholders who follow pensions policy, and not just in industry.  Significantly, those reforms look like commanding very strong cross-party support.  The morning after the Mansion House speech, I hosted Jonathan Ashworth, Labour’s shadow work and pensions secretary, for a speech and question session in my office.  When Mansion House was raised, it was notable that Ashworth didn’t just support the package, he sought to claim credit for much of it, arguing that Labour had led the argument for more pension money going into more productive, high-return assets.

That favourable reception and political consensus might well persuade some industry participants that Mansion House is the start of a happy period for pensions and PE.  I believe that optimism would be misplaced. 

Mansion House may well be good policy, but it increases the reputational and communications risks facing the pensions sector and the PE industry. It may well make today’s workers better off when they reach their eventual retirement, but in the (long) meantime, it also raises the chances that at least some of those workers see headlines about their money being handed to well-paid managers and invested in asset classes that they distrust and dislike. Should even some PE funds where pension money has been invested underperform or fail, it is almost inevitable that media outlets (traditional and social) will focus on the losses to savers and the fees paid to managers.

Let me explain the point through a real-world example. NEST, the default fund for 10 million workplace pension savers, was, even before Mansion House, seeking to put 5% of its assets into PE. That has led to a mandate for HarbourVest, an early investor in firms such as Uber and Klarna. Vanishingly few of those 10 million people - or their representatives - know that their retirement savings are being invested in PE portfolio companies. But if some of those companies start to struggle as rates rise and overall returns don’t live up to the politicians’ hopes, it would be no surprise if at least some stakeholders start taking a critical interest in pension funds’ PE investments and PE fees.

Political consensus is generally a fragile thing. It’s all too easy to imagine a future government with Labour leadership coming under intense pressure to revisit some of the elements of Mansion House if public perceptions of higher fees and underperforming PE investments take root.

Short-term pain for long-term gain is a familiar and often sensible approach to many aspects of life, as any jogger or gym-goer can tell you. But it depends on consent: the people exposed to that pain need to understand and accept it as necessary. Industry participants this week celebrating the Mansion House reforms should get ready for the consequent communications challenges that lie ahead. 

Ends

Contact:

James Kirkup
Email: jk@apellaadvisors.com