How do I stop my pension being used to promote economic growth - I think Rachel Reeves is ignoring the risks: STEVE WEBB replies

I would appreciate you doing a piece on the recent Mansion House accord.

It worries me for my default pension fund investments with my own pension firm (I see they are signing up).

I note Rachel Reeves says it will 'boost pension pots', which ignores the downside risk. And I do not want to take part.

Are there pension suitable funds out there that I could select that will not take part in this?

To be clear I want to stay with my current provider as my pension is still receiving employer contributions.

Steve Webb replies: The Mansion House Accord is a voluntary agreement entered into by 17 large pension schemes and pension providers last month.

These schemes have signed up to a target that 10 per cent of the money in what are called their 'main default arrangement' (of which more later) will be invested in 'private markets', with at least half of this being in the UK.

You can see which schemes have signed up and read the full text of the Mansion House Accord here.

There are a few technical terms used in that description which it is worth explaining, as they are relevant to your question.

The first is the idea of a 'default arrangement'. This is simply the place where your money is invested unless you make an active choice to do something different.

In most schemes, the vast majority of member savings are held in these 'default' arrangements, but there will generally be other options in which you can invest which are not covered by this agreement.

The second is the idea of 'private markets'.

Historically, a lot of pension money has been invested in things like the major stock markets in the US, the UK and around the world.

Large amounts have also been invested in things like government debt (like UK government bonds, called gilts). These types of investment are in 'public markets'.

But governments (and pension schemes) are increasingly interested in other ways of investing which they believe have the potential to generate more economic growth (for society as a whole) and potentially better returns to members.

This could include investing in start-up or 'early-stage' businesses which are not (yet) listed on stock markets.

It could also include investing directly in things like big infrastructure projects such as the upgrade to the national grid needed in the coming decades as the way we power our economy changes.

In principle, there is no reason why an allocation to these 'private markets' should be damaging to your pension.

Although the costs tend to be higher, the expected return over the long-term is typically also higher.

But it is true to say that there is greater uncertainty about those returns, which is why private markets will typically be only a relatively small part of the overall investment mix – 10 per cent in this case.

If you read the text of the Accord, you will see that there are several safeguards built in to protect members.

Fiduciary duty: The trustees (and others) who oversee your pension have an over-riding duty to put your interests first.

The goal of 10 per cent investment in private markets by 2030 is subject to the trustees being confident that in doing this they are still acting in your best interests.

Consumer Duty: In July 2023, the Financial Conduct Authority introduced the powerful concept of 'Consumer Duty' which applies to the insurance companies who provide pensions.

In simple terms, they now have an over-riding duty to do right by their customers. Although it is pretty shocking that such a rule was needed, it has already had a powerful impact in the financial services sector.

Signatories to the Mansion House Accord have said that they will only pursue the 10 per cent target if it is consistent with their responsibilities under 'Consumer Duty'. You can read more about Consumer Duty here.

If the Mansion House Accord was simply a voluntary agreement, with schemes only heading for 10 per cent if they were confident it was in the member's interest and consistent with the duty to do right by their consumers, then you could probably be fairly relaxed about all of this.

But there is a sting in the tail.

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The Government is not convinced that the industry will deliver on this goal (partly based on the slow progress on previous similar initiatives) and so are planning to give themselves a power via the recently-published Pension Schemes Bill to force pension schemes to invest a particular proportion of their default funds in private markets.

Although the Bill contains a safeguard where schemes can argue that they should be exempt from this if they are convinced it would not be in the members' interests, this is still a pretty big stick, and will put pressure on schemes to hit the target.

My personal view is that the Government simply should not be doing this.

If the Mansion House Accord is clear that trustees' first duty is to their members, and that schemes should do right by consumers, then I cannot see how the Government can justify a threat to over-ride all of this.

In practice however, a 10 per cent allocation to private markets is probably a reasonable enough thing for large schemes to do, and I suspect that most of the signatories were happy to sign up on the basis that they were planning to go down this route in any case.

If you remain unhappy, you have the option of simply moving your workplace pension money into one (or more) of the alternative investment choices available.

You should be aware that these funds may have higher charges (as they are not covered by the 0.75 per cent charge cap on workplace pensions) and you will need to understand what level of investment risk you are taking on.

But you may be reassured to know that you can stay with your current provider but without being bound to remain in the arrangement covered by the Mansion House Accord.