Mercer joined the Mansion House Compact in July 2023 as one of the first signatories, committing to allocating at least 5% of its default funds to unlisted equities.
In the first in a series of interviews, Philip Parkinson, UK investment and retirement lead, and Suzanne Rose, UK DC lead, spoke to IPE on how they plan to deliver on the target.
For Mercer, a private equity allocation is part of a wider business strategy around increasing investments in private markets, according to Philip Parkinson, the consultancy’s UK investment and retirement lead.
“We think that there are benefits of doing that both for enhancing returns but also managing risk,” he said, adding: “We also think increasingly a lot of companies are rushing to list on exchanges so if you want to have impact with growth or things like the transition, a lot of that happens off publicly listed exchanges.”
A well-diversified, long-term investment strategy for a defined contribution (DC) investor should include private markets, he continued.
Parkinson pointed out that Mercer has a master trust in Australia that holds $50bn in assets, of which 15-20% is invested in unlisted assets, including property infrastructure, private equity, and hedge funds.
He said: “The concept of investing in a diversified set of assets is well understood and we think now the UK is probably at a point structurally and maturity-wise that we are able to start implementing that here.”
And while the Mansion House Compact calls for a 5% allocation to unlisted equity by 2030, Parkinson said it’s not Mercer’s view that “the optimal is only 5% to private equity”.
Parkinson also noted that the timescale for reaching that target depends on the clients. “I can envisage some clients wanting a 10% private markets allocation straightaway, and that will be fine with us. And certainly by 2030 we would expect our private markets allocation to be larger than 5% for sure.”
This exposure will grow as Mercer increases its private markets exposure – the 5% committed through the compact is just a starting point, according to Parkinson.
Suzanne Rose, Mercer’s UK lead, said the firm is currently working on implementing an allocation to private markets within its default investment strategy for all clients. “We do firmly believe that an allocation to private markets is in the best interest of members.”
She said Mercer had “quite long” discussions about the cost of such strategy and whether it should be passed on to client members. But ultimately, she said that Mercer believes the additional cost associated with an allocation to private markets is warranted and it delivers additional value for members.
Rose admitted that the ability to pass those significant additional costs onto clients without having a track record or without the market and client’s confidence and experience in private markets was “quite challenging”.
“This is quite innovative and quite new. To say ‘we’re going to do this and it’s going to deliver these great returns but you’re going to pay for the privilege of that’ is a quite difficult message,” she noted.
Therefore, she said the approach is to go “slow and steady”, adding that the initial focus will be on private debt and infrastructure, with less exposure to private equity, but it will slowly build over time.
“We’ve got to think about how cost effective it is to deliver this for a platform solution. How do we actually deliver it in the right vehicle, but how do we do it in a way that allows us to grow that allocation over time?,” she asked.
This is not the first time Mercer is looking at a new asset class. Parkinson said that in the last eight years of running its master trust, asset diversification had “effectively proved that it improves the retirement expectations of members”.
And while Mercer has not allocated to private markets before, it did introduce liquid hedge funds and other “growth fixed income credit type allocations”.
Parkinson said that while it has not allocated to private markets for its master trust before, it is working with asset managers managing $142bn (€130bn/£112bn) in private markets programmes already for clients globally.
Parkinson added that Mercer has “quite a diversified portfolio” compared to other master trusts.
“The way we break that down is by equities. The growth phase of the master trust often has that as its core engine but then we have three other buckets that we look at and allocations depend on where we are in the cycle and valuations because we run a dynamic process that flexes up and down. We don’t set that for any length of time,” he explained.
The first bucket comprises real assets, including exposure to property and infrastructure on a listed basis, while the second consists of alternatives, including liquid hedge fund exposure. The third bucket incorporates fixed income, high yield, credit and other non-investment grade credit, he said.
“Some of those are dependent on where we are in the cycle. We’ve certainly changed those allocations over this year in line with changes in interest rates and inflation. That demonstrates that we’ve always had a quite wide toolkit when it comes to how we manage the asset allocations,” Parkinson said.
Mansion House Compact explained
The Mansion House Compact is a commitment announced by the UK chancellor Jeremy Hunt in his keynote policy speech at the Mansion House on 10 July which calls on DC pension schemes to boost investment in UK unlisted equities.
As part of the compact, its signatories are expected to allocate at least 5% of their default funds to unlisted equities by 2030.
Currently, the DC schemes’ investment in UK unlisted equities is under 1%.
According to the chancellor, if the UK’s DC market follows suit, this could unlock up to £50bn of investment into high-growth companies by that time.
The initial signatories of the compact included Aviva, Scottish Widows, Legal & General, Aegon, Phoenix, NEST, Smart Pension, M&G and Mercer.
Since then, Aon and Cushon joined as signatories of the compact.
Read the digital edition of IPE’s latest magazine