Mandation was never the way to get pensions investing in venture capital
The VC industry should welcome the watering down of the Pension Schemes Bill – self-regulation, not the blunt instrument of mandation, is the answer, says Duncan Johnson
After four back-and-forths between the two parliamentary houses, the Pension Schemes Bill is set to gain Royal Assent after the Lords accepted a final draft on Tuesday. The sticking point? Mandation. If the bill had not been changed, it would have allowed the Secretary of State to legally compel pension funds to invest in specific asset classes. You would think a CEO of a UK venture capital (VC) investment business would be disappointed by the late change of heart, but it’s quite the opposite.
The government eventually decided to compromise (a key skill in our world, though not seen as much in Westminster) and listened to the concerns raised by the House of Lords. As part of the final government amendment, the bill will include hard statutory caps but limiting mandation to 10 per cent of a default fund, of which up to five per cent may be directed into UK assets.
The most likely result of mandated investing is poor returns and a failure to generate the growth and next-generation economy we so clearly need
Whilst this final change will be celebrated by the wider pensions industry, I expect that the venture capital community’s reaction will be less enthusiastic. I, like the next VC investor in the UK, would like to see more pension money flow into our asset classes – it is how you go about achieving this result that is the contention. Back in the summer of 2025, 17 major pension providers voluntarily pledged to invest 10 per cent of their default funds in private markets by 2030, with half earmarked for the UK, in a move called the Mansion House Accord. Self-regulation and owning change are far better ways to evolve than to mandate, where accountability becomes an empty word. The most likely result of mandated investing is poor returns and a failure to generate the growth and next-generation economy we so clearly need.
The Mansion House Accord works
The Mansion House Accord has done an excellent job of highlighting the lack of UK investment in private assets, and I’m all for creating a dialogue to encourage more investment across various private asset classes. Mandation is always a blunt instrument. Pension funds exist to deliver long-term, risk-adjusted returns for their members, not to serve as a policy lever. Venture capital is inherently high-risk, where the majority of investments fail to return capital, and only a small number generate outsized returns. Forcing greater exposure to that risk profile without the skills, knowledge and management capability would have raised legitimate concerns about alignment with pensioners’ interests.
The paradox is that pension fund capital has many attributes that make it a great holder of more illiquid, higher-risk growth assets when managed in a suitably constructed and managed fund. Take Canadian pension funds, for example, where the largest funds have an estimated £25-£29bn deployed in venture capital and late-stage venture growth globally. Most major Canadian funds allocate between one per cent and three per cent of their total assets specifically to venture capital, with strong returns for the major pension funds of between seven per cent and 10 per cent annualised return over the last decade.
When we set up Northern Gritstone some five years ago, we recognised the difficulties pension funds with little or no VC exposure faced in investing in our investment company, so we developed an investment mandate that worked for them. Smoothing the journey while ensuring the potential for the necessary VC outlier high performers, and showing the fantastic local, regional, and national impact we could have through this activity, were both key. The result, 70 per cent of our c.£400m of capital is from UK pension funds.
The UK still has a problem: far too little pension capital flows into high-growth companies, so well done to the Labour MP and pensions minister, Torsten Bell, for gripping this nettle. But mandation was never the right solution. If we want more pension investment in venture capital, the answer lies in better alignment, stronger relationships, and a more mature investment culture.
Duncan Johnson is CEO of Northern Gritstone