From Morningstar: 2025-06-02 06:30:00

Recent changes in the UK pension industry are introducing new terms like “megafunds” and “LTAFs” as the Labour government aims to improve returns on the £800 billion invested in defined-contribution schemes. The government is taking a more active role in private pension planning, with a focus on boosting the UK economy.

UK pension giants have signed the Mansion House Accord, agreeing to allocate 10% of default funds into private assets by 2030, with at least 5% in UK assets. This follows a plan introduced by the previous Conservative government in 2023. Concerns remain about government overreach and potential impact on investor outcomes.

The UK is looking to Australian and Canadian “megafunds” for inspiration in restructuring pension funds to boost economic growth. Pension providers are now mandated to invest in infrastructure, UK assets, and private markets, with a focus on long-term asset funds (LTAFs). Balancing growth opportunities with risks and investor outcomes remains a challenge.

The creation of pension “megafunds” with over £25 billion in assets is part of the government’s plan to consolidate smaller funds for cost efficiency and purchasing power. Pension providers are cautious about the practical implications of this policy, balancing support for industry engagement with skepticism about potential risks and benefits.

The Mansion House Accord includes a voluntary agreement for pension providers to allocate 10% of default funds into private market assets by 2030, aiming to offer savers better returns. However, market factors like interest rates and bond yields will impact the success of this strategy. Pension schemes face challenges in balancing commitments and investor interests.

Private credit, a riskier element of the plan, is raising concerns about weak covenants and potential default rates. The inclusion of private credit in the push toward private markets could introduce additional risks to pension funds. Performance expectations and market conditions need to be carefully considered to protect investor interests.

Long-Term Asset Funds (LTAFs) offer pension funds easier access to illiquid assets like private equity and infrastructure. Many master trusts are already using LTAFs to diversify investments, but manager selection remains critical. The dispersion of returns for private market funds is wide, highlighting the importance of selecting the right managers for these funds.

The government’s Pension Schemes Bill includes a legislative backstop allowing it to dictate asset allocation if sufficient progress is not made by pension providers in the next five years. Concerns remain about how much control the government will have over pension fund investments and the potential impact on savers.



Read more at Morningstar: What The Chancellor’s ‘Megafunds’ Plan Means For UK…