How to make the Mansion House Accord work
Background
In the latest blog, my colleague Bart Heenk has rightly identified governance as the critical ingredient making all the difference between success and failure of the Mansion House Accord.
A quick recap: Under the voluntary Mansion House Accord, 17 of the UK’s largest DC pension funds self-committed themselves into investing at least 10% of their assets into private market assets by 2030, with 5% of the total allocated to the UK. On a further note: This legally non-binding agreement is about to get reinforced by a back-stop regulation giving the regulator the power to force DC pension funds into these investments if they fail to do so voluntarily. This regulatory backstop makes it all the more urgent to design an appropriate investment governance framework.
For a long time, governments around the world have been looking into ways of mobilising pension funds’ money for domestic investments. This article draws on international experience with Economically Targeted Investments (ETI) and investigates what works and what doesn’t. Finally, we will attempt to come to a solution on how it could work. We define ETI investments as: Investments which serve a specific economic and/or social purpose apart from the investment return to the beneficiaries. ETI investments may include, for example, investments in local infrastructure, social housing, or government-preferred projects in general.
ETI in the United States
For decades, governments had meddled with investment-decisions of Government Pension Funds, directing money into politically preferred projects, like social housing or infrastructure. Iglesias and Palacios researched 2000 managements and outcomes of these public pension reserves. They found very mediocre yields for the beneficiaries and concluded that “these findings are consistent across countries of all types, but returns are especially dismal in countries with poor governance”. Also in the United States, public pension funds have a long history with ETI investments going back into the 1960s (Dixon and Woelfel, 2017). The highly politicised boards of public pension funds often discussed investments more from a social and ethical perspective. The importance of risk-adjusted returned varied greatly.
Over time, a widespread consensus evolved that the right way to direct pension funds’ money into socially preferred projects is via governments setting the right incentives thus turning these projects into investment opportunities that are attractive for pension funds under a strict risk-return framework. Research projects at the Universities of Harvard and Oxford developed guidelines and standards for US public pension fund investments in urban development and urban renewal in collaboration with major American pension funds (Hagermann, Clark, Hebb, 2007; Beeferman, 2008).
The process of professionalising pension fund infrastructure investments was shaped by the following findings:
The risk-adjusted return must not lag behind alternative investments.
The security requirements of institutional investors must be taken into account.
Size and structure of investment projects and investment needs of pension funds must be reconciled.
Following the “economic route” also opened a solution for trust law countries to reconcile the trustees’ fiduciary duty of acting solely in the interest of the beneficiaries with ETIs. This was especially relevant in the US, where fiduciary duty had always been interpreted along the lines of modern portfolio theory. The Department of Labor endorsed ETI firstly in 1994 in an Interpretive Bulletin, which has been adapted but basically restated in 2008 and 2015: Fiduciaries may invest in ETIs as “long as the investment is appropriate for the plan and economically and financially equivalent with … competing investment choices”1.
More recently though, this consensus seems to be waning giving way to more direct interventions into pension funds’ investment decisions.
The Canadian debate
In Canada, more than 90 CEOs asked the government “to amend the rules governing pension funds to encourage them to invest in Canada”2 to help closing Canada’s productivity gap compared to the United States. This initiative was answered by Keith Ambachtsheer et al (2024) with a research paper on the domestic investments of Canadian pension funds cautioning against governmental interference into the pension funds’ investment decisions as “it would come with a cost to pensioners”. Instead, the government should improve the framework and incentives for Canadian pension funds to make it attractive for them to invest domestically.
This debate also triggered a recent paper by the ICPM together with some of the largest pension funds on “Unlocking Domestic Investment Opportunities - Aligning Public Goals with Pension Fund Realities”3 offering a practical framework for governments on how to attract private capital, stressing – again – the importance of risk, return, alignment with pension funds’ needs and a stable regulatory, legal and institutional environment.
What this paper did not touch on, but what was stressed by the Oxford project was the importance of intermediaries in this process. Intermediaries are essential, firstly to provide the necessary research and expertise, and secondly to balance capital demand and supply in terms of volume and geography. This now finally brings us back to our entrance question on governance. How do we manage to align interest between the stakeholders and create value for the beneficiaries of the pension funds as well as for society as a whole?
The Solution
What is needed is a value-creation framework as opposed to a value-extraction framework. The latter would be the classic GP-LP constellation with pro-profit operating private equity or infrastructure asset manager extracting quite a chunk of the returns. How could we build an alternative? We believe, one option would be by setting up a specialised not-for-profit platform by the pension funds themselves that have agreed to invest under the Mansion House Accord. Of course, critical thought must be given into properly staffing it with the required expertise and the entire organisational set up. But done rightly, this could offer a route into successfully bridging performance needs and social commitment.
How Avida could help
Avida could help, firstly, by developing the governance framework for the platform and, secondly, by assisting the pension funds with their internal investment governance. With over 20 years of pension and investment experience Avida is in a strong position to give independent and expert advice.
If you’re preparing for the Mansion House Accord, Avida provides hands-on support to help you manage change with clarity and control. Get in touch with an advisor here.
Bibliography:
Ambachtsheer, K. Betermier, S., Flynn, C. (2024): Should Canada Require its Pension Funds to Invest More Domestically?”, Global Risk Institute in Financial Services (GRI), available at: www.globalriskinstitute.org.
Dixon, L., Woelfel, T. (2017): The Pursuit of Financial Return and Societal Benefit: An Examination of Pension Fund Economically Targeted Investments, prepared by Insight at Pacific Community Ventures.
ICPM (2025): Unlocking Domestic Investment Opportunities: Aligning Public Goals with Pension Fund Realities. https://www.icpmnetwork.com/network-news/unlocking-domestic-investment-opportunities-aligning-public-goals-with-pension-fund-realities/ visited 10/11/2025
Iglesias, A., Palacios, R.J. (2000).” Managing public pension reserves”. Social Protection Discussion Paper No 003. The World Bank. Washington.
