Rachel Reeves wants your pension to back Britain. It could cost you

The firms — which include Aegon, Aviva, Legal & General and Royal London — have pledged to allocate at least half the 10 per cent to private UK assets, including renewable energy infrastructure, companies not listed on the London stock exchange, private equity funds and venture capital investors that back early-stage businesses. These are typically much riskier than well-established companies.

The chancellor, Rachel Reeves, insists it will boost the British economy and lead to better outcomes for savers in the long-term, but critics say it could leave savers worse off.

Brian Byrnes from the saving and investing app Moneybox said: “In theory, greater investment in UK businesses by UK pension funds could support long-term economic growth, which should benefit everyone’s retirement outcomes over time. However, the focus appears to be more on supporting UK listed and unlisted companies, rather than on improved financial outcomes for savers.”

This is what you need to know about the upcoming changes.

Could this be risky for your pension?

Investing in unlisted companies comes with the potential for greater rewards, as smaller, early-stage businesses can grow at a faster rate than established firms. However, there are also greater risks — many of these companies will fail, losing their investors money. Experts usually recommend that only seasoned investors should choose these assets, and that they invest only a small proportion of their portfolio in them.

Workplace pension schemes have tended to invest in simpler assets, such as government-issued bonds or funds that track the stock market.

Now the government has hinted that it could force pension firms to invest more in the UK if they did not do so voluntarily. That has caused controversy in the pensions industry, which has a duty to ensure the best possible retirement outcomes for savers.

Could this make you richer?

The British Private Equity and Venture Capital Association (BVCA) represents about 600 investment firms, which back 13,000 UK companies. Its members’ investments have returned about 14.5 per cent a year since 1980 and 17.8 per cent a year since 2014, it said. For comparison, the MSCI World — an index of 1,352 companies and a barometer for the global stock market — has returned 8.46 per cent a year since the end of 1987 (the furthest back for which figures are available) and 17.3 per cent since 2014.

But the strong returns from private assets were heavily driven by the period of ultra-low interest rates from the aftermath of the 2008 financial crisis to the end of 2021, said Jason Hollands from the wealth manager Evelyn Partners.

This allowed companies to borrow money cheaply, helped to drive their expansion, and also boosted interest from investors looking for inflation-beating returns. Annual returns on private assets peaked at 43.5 per cent in the second quarter of 2021, according to the capital markets research company PitchBook.

Yet more recently, returns have lagged behind the wider stock market. In the five years to the end of 2023 the BVCA said all UK-managed venture capital and private equity funds returned 12.6 per cent a year, and UK-focused funds (those with more than 60 per cent of their investments in UK-headquartered businesses) delivered 10.3 per cent a year. The MSCI World returned 14 per cent a year over the same period. The BVCA said the impact of high inflation and its effect on private market valuations had worsened returns in the past few years.

While interest rates are now easing from their peak, Hollands said they are unlikely to return to their record lows, making it harder for private equity, property and venture capital to replicate those stellar returns of the past two decades.

The pension company PensionBee looked at the hypothetical performance of a £50,000 lump sum investment. It assumed that pot one was invested fully into a proxy for the MSCI World index, returning 14 per cent a year.

Pot two was 90 per cent invested in this index, 5 per cent in UK-focused private equity and venture capital assets delivering 10.3 per cent a year, and 5 per cent in global private equity and venture capital assets delivering 12.6 per cent a year. These returns are based on performance for these assets over the past five years.

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Assuming these levels of returns remained consistent, after 30 years pot one would be worth £2.55 million, and pot two £2.43 million — about £119,000 less. However, these figures do not factor in fees, meaning that pot two could end up being worth even less.

Pension default funds are only allowed to charge a maximum of 0.75 per cent in fees, but the fees on unlisted assets are not capped.

Romi Savova, the chief executive of PensionBee, said: “Despite all the hoo-ha about private investments being an important driver of superior long-term pension returns, evidence of outperformance is scant.

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“Studies tend to conclude that public markets deliver similar or higher returns. And while returns from private investments are not guaranteed, higher fees almost certainly are.”

Will your pension be affected?

You can contact your pension firm and see if they have signed up to the changes. While they will be implemented by 2030 it is likely that they will be phased in earlier than that. Your pension company will be able to give you more details on how they will change the asset allocation to their default fund.

Can you opt out?

The best way to take control of your pension pot is to opt out of the default fund. While some default funds have a small allocation to unlisted assets, this could change under the new rules.

Pension firms typically offer a range of funds, whose investments differ depending on how much risk you are willing to take. Those who want more choice could consider a self-invested personal pension, through a platform such as Hargreaves Lansdown or AJ Bell, where you can pick from thousands of investments and manage your own portfolio.