11 July 2023

Mansion House Reforms watershed in BIA’s quest to unlock pension funds

The Chancellor’s reforms and the Mansion House Compact, announced on 10 July, promise to increase investment in innovative sectors of the UK economy, including life sciences and biotech. This watershed moment follows many years of work by BIA, as our Head of Policy and Public Affairs, Martin Turner, explains here.

Last night in the City of London at the annual Mansion House Dinner, the Chancellor and Lord Mayor of London announced a voluntary agreement by the pensions industry committing to change their investment approach and focus 5% of their allocation into unlisted equities.

BIA has been working on this agenda since at least 2017, when we responded to the Government’s Patient Capital Review, identifying the lack of scale-up capital for life sciences and the opportunity of un-tapped capital in the UK’s pension funds, which do not invest in equities. You can read more background to our past work in my 2019 blog.

Last night’s package marks a key milestone in our work, and a watershed moment in a decade when it comes to UK investment into biotech. As our CEO, Steve Bates, says: as Nasdaq sleeps, London is waking up.

The Mansion House Compact

The package includes the Mansion House Compact, which is an agreement by pension providers to allocate a minimum 5% to unlisted equities through defined contribution (DC) pension funds, and other sources of long-term savings, by 2030. Unlisted equities includes venture capital backed companies and those quoted on London’s growth market, AIM. The announcement highlights life sciences, biotech, fintech and clean technology as sectors that will benefit.

Over the past six months we have spoken to most of the main DC providers, and they have told us that they are reaching a critical scale (auto-enrolment began ten years ago) allowing them to diversify into venture capital and that they are interested in life sciences. Currently, just 1% of the £4.6 trillion of UK pensions and insurance assets, and just 0.5% of UK DC assets, is invested in unlisted UK companies. There is clearly scope to increase this allocation as part of a diversified investment approach, thereby benefitting innovative sectors of the economy and delivering better returns for savers. A report by the British Business Bank and Oliver Wyman found that retirement savings could be increased by 7-12% for a 22-year old, for example, if their DC pension scheme made 5% of investments in the UK’s fastest growing and most innovative companies.

The founding signatories of the Compact are Aviva, Scottish Widows, Legal & General, Aegon, Phoenix, NEST, Mercer, M&G and Smart Pension. It is not yet known which route they will choose to invest, but it is likely to be via investment vehicles in most cases, rather than direct. This could unlock up to £50 billion of investment in high growth companies by 2030 if all UK DC pension schemes follow suit.

To ensure that the money unlocked by these reforms is invested quickly and effectively, the Chancellor has asked the British Business Bank to explore the case for government to play a greater role in establishing investment vehicles. This will complement the £250 million of support that government has made available through the Long-term Investment for Technology and Science (LIFTS) initiative to incentivise new industry-led investment vehicles.

Further reforms to increase access to capital

The Compact was only one element of the Chancellor’s Mansion House Reforms. There were further measures to unlock pension funds and improve UK companies’ access to capital markets.

A key problem across the pensions industry raised by BIA and many others is an excessive focus on low fees at the expense of long-term returns. To help address this, a new Value for Money Framework will make clear that investment decisions made by pension firms should be based on overall long-term returns and not simply costs. Pension schemes which are not achieving the best possible outcome for their members will be wound up into larger, better performing schemes.

For Local Government Pension Schemes, a consultation will be launched on setting an ambition to double existing investments in private equity to 10%, which could unlock £25 billion by 2030. The consultation proposes a deadline of March 2025 for all Local Government Pension Scheme funds to transfer their assets into LGPS pools and setting a direction that each pool should exceed £50 billion of assets.

Improving stock markets

The Chancellor’s Mansion House Reforms go beyond unlocking pensions. He has also announced a wide range of measures to improve the stock market, many of which seek to address issues BIA has highlighted before.

The most eye-catching is a plan for an ‘intermittent trading venue’, which will allow private companies to trade their shares on a public platform within defined windows of time throughout the year. This will be the first of its kind worldwide and could allow early-investors and employee shareholders to cash-out of a company before an IPO, and bring in new later-stage investors.

The Government has also accepted all of Rachel Kent’s Research Review recommendations published today, paving the way for a new 'Research Platform' that will provide a one-stop-shop for firms looking for equity research experts. It also sets the path for potentially removing the MiFID II unbundling rules – an EU law that requires brokers to charge a separate fee for research, something that many claim has led to a severe reduction in research coverage on small-cap biotech stocks.

How we got here

BIA has been on this journey for a long time. We have consistently highlighted the importance of increasing the availability of scale-up capital for UK life sciences and doing this by unlocking new sources of UK-based capital, such as pension funds.

We have successfully called for regulations to be amended and asked the government to play an active role in urging pension funds to invest in venture capital.

In September 2021, the Life Sciences Scale-Up Taskforce was established by the Business Secretary and tasked with identifying the actions needed to increase access to finance for scaling life science companies, including from UK institutional investors. BIA was instrumental in proposing and running the Taskforce alongside the Office for Life Sciences, based on our belief that more UK-based investors would help support and anchor companies here. Top of its recommendations, informed by detailed work done for us by PwC, was for the UK Government to establish its own Tibi scheme – a French initiative in which President Macron secured the agreement of French pension funds and institutional investors to invest €3.5 billion into venture capital funds. We said championing of this at the highest levels of Government to help move the pensions industry was essential. The Taskforce also recommended Government-co-investment to leverage in pension funds and the creation of special investment vehicles to enable this.

Together, the Compact, new vehicles being explored by the British Business Bank and LIFTS deliver much of what BIA proposed through the Life Sciences Scale-Up Taskforce and in previous and subsequent consultation submissions.

What next?

This is a significant milestone but not the end of the journey. It will take several years for the capital to begin flowing to a significant degree – the Compact sets the deadline of 2030 to reach the 5% target.

BIA and our Chair, Dan Mahony, who is also the Government’s Life Sciences Investment Envoy (another recommendation from the Taskforce), are now focused on ensuring that life sciences is ready to receive its share of the fresh capital unlocked by the Mansion House Reforms. This may require further policy work with Government, and we will continue working with the pension funds themselves, life science specialist investors and other City institutions to make sure everyone understands and is able to access the opportunity of UK life sciences investment.

You can read the reaction of our Chair and CEO in our official press release. We would love to hear what you think of these announcements and the impact they may have on your business.