How do you boost an economy after years of sluggish growth? This pressing challenge has been front and centre since the Labour government returned to power, with a clear focus on boosting investment, raising productivity and rebuilding confidence in the UK as a thriving hub for business.
With increases to public spending already underway to support economic growth, attention is now turning to alternative levers. One of the most interesting? Dialling up institutional investment into private markets through pension funds.
The ripple effects could lead to compelling opportunities for the retail market, including new advice opportunities and broader diversification for clients.
A historical shift in pension allocations
Over the years, UK pension funds have steadily reduced their exposure to domestic assets in favour of pursuing higher returns from overseas allocations.
With increases to public spending already underway to support economic growth, attention is now turning to alternative levers
In 2024, just 4.4% of UK pension assets were held in UK equities and private market exposure has been similarly limited. This lack of domestic investment is leaving British businesses short of growth capital, particularly at the scale-up stage.
It’s in this context that conversations around private markets have recently gained momentum. Notably, could pension schemes be doing more to back British businesses?
Introducing the Mansion House Accord
As part of its broader growth agenda, the government recently launched the Mansion House Accord, a new initiative aimed at boosting investment into UK assets. It builds on the foundations laid by the earlier Mansion House and marks a significant step forward, both in number of signatories and deeper allocations to private markets.
Under the new Accord, 17 of the UK’s largest workplace pension providers have committed to allocate at least 10% of their default defined contributions (DC) to private markets by 2030, with at least 5% invested allocated to UK assets – including AIM-listed shares.
Pension industry aligns on UK growth with Mansion House Accord
The redirection of pension capital into areas such as venture capital and infrastructure could be transformative, helping to close the scale-up funding gap and encourage more UK-based listings.
The role of retail investors
A growing sense of optimism is taking hold, and an influx of institutional capital typically acts as a strong indicator of confidence within that asset class. That confidence often cascades to advisers and retail investors, whose active participation is essential in broadening market access, deepening liquidity and supporting the long-term growth and stability of the UK’s private markets.
Yet despite this, many advisers remain cautious. According to a NextWealth survey published in November 2024, only 2% of UK-advised client assets are invested in private markets assets, compared to a global benchmark of 15%. The main barriers? Illiquidity, increased regulatory and compliance burden, and a lack of familiarity with the asset class.
So, what could advisers do to get more comfortable with private markets? And how can providers support that journey?
Accessing private markets: VCTs and EIS
The UK already has strong foundations in place to access private markets. Two standout options for retail investors to consider are Venture Capital Trusts (VCTs) and the Enterprise Investment Scheme (EIS), both of which recently celebrated their 30th anniversaries. Over the years, they’ve been instrumental in supporting high-growth businesses, advancing innovation and driving economic growth in the UK.
Both VCTs and EIS offer a range of tax reliefs to compensate retail investors for some of the risks involved in backing early-stage companies
The government’s recent extension of the VCT and EIS sunset clause to 2035 signals a strong vote of confidence in these schemes. It offers greater certainty for the industry and a clear commitment to mobilising private capital to support the next generation of British businesses.
Crucially, both VCTs and EIS offer a range of tax reliefs to help compensate retail investors for some of the risks involved in backing early-stage companies. Given the higher tax burden investors have faced in recent years, along with the upcoming challenge of unused pensions entering the taxable estate from April 2027, both schemes may present valuable new planning opportunities for suitable investors.
Kirsty Barr is co-head of retail investments at Octopus Investments