Within the DC landscape, the pensions world is witnessing a significant move; nine of the UK's largest DC providers, holding over £400bn in assets, have committed to the objective of allocating 5% of default fund assets to unlisted equities by 2030.

This is a substantial jump from the current 1%. According to the Chancellor, if all UK DC schemes align with this trend, we could observe up to £50bn funnelled into high-growth companies by 2030.  

But this commitment, as monumental as it sounds, isn’t without its nuances. In this blog, we look at why providers have signed up or not, and what the journey to reaching this commitment looks like. 

The Compact’s Evolution: The Mansion House Compact has evolved considerably from its preliminary announcement to invited audiences. Originally, the proposal centred on venture capital investments within the UK, with hints at mandating UK DC schemes. The emphasis of the revised version has significantly shifted towards acting in the best interests of savers, a move that we view positively.  

The spectrum of commitment: Though only nine DC providers have been spotlighted, the spectrum stretches from the Prudential With-profits Fund (M&G) to modern tech-based solutions like Smart. However, it is notable that some leading master trust providers did not choose to sign up, including Aon, Fidelity, LifeSight and Standard Life (although Phoenix have).  

Signatories value the benefits of unlisted equities: Signatories support the introduction of an allocation to unlisted equities from an investment perspective, believing this type of initiative will help make the asset class more commonplace in the market, benefitting DC members in the long run through potential higher net returns whilst also supporting economic growth.  

Reservations from some master trust providers: Whilst the direction towards less liquid DC assets has been met with optimism, not all master trusts have jumped onboard. Four major master trust providers have hesitated, primarily due to the Compact's narrow focus on unlisted equity. These providers highlight their exploration in broader illiquid asset classes such as private debt, infrastructure, and real estate.  

Current allocations to unlisted equity: Cushon, which hasn't officially signed the Compact (and who were not approached prior to the announcement), already have an allocation to unlisted equity in their default, along with Nest, who has signed the commitment. Another two master trusts, L&G and Smart, have already ventured into illiquid assets more broadly, through private debt. 

Concerns over fees: Some master trusts currently offer two defaults; a lower and higher cost option, with the higher cost default accessing more alternative asset classes. It is likely that when unlisted equities are introduced it will be in the higher fee default, with further master trusts stating that offering an alternative higher cost default is an approach they are considering.  

The road to reaching the 2030 commitment: The integration of illiquid assets, including unlisted equities, into master trusts is still in its infancy. Decisions around geographical and sector allocations are ongoing. While many master trusts have shown support for the Mansion House Compact, there isn't an imminent rush to introduce allocations to unlisted equities. The long-term aim remains clear, but as expected the present concern revolves around the costs associated with integrating these unlisted equities. A solution by some, to introduce a pricier 'default' option, would reduce the headline £50bn figure considerably. Most providers have highlighted that unlisted equities are just one part of broader illiquid asset classes that they are exploring. To the extent these asset classes, including unlisted equities, are included in the main default in the long run will be guided by cost and take up.