Two of the largest City firms have joined forces to invest as much as £20bn of pension money in fast-growing UK businesses such as green energy, after government reforms designed to increase returns for savers and the British economy.

Phoenix Group, the country’s largest savings and retirement business, and Schroders, the investment manager, announced the launch of a joint venture to plough pensions money into high-growth companies which are not listed on the stock market.

Aiming to deploy between £10bn-20bn into private markets over the next decade, the investment vehicle, Future Growth Capital, aims to build on former chancellor Jeremy Hunt’s “Mansion House compact,” a deal reached last year to get the UK’s largest pension fund managers to invest in fast-growing businesses.

Hunt’s deal with City firms aimed to boost pension fund investment in unlisted assets, which can be riskier than publicly quoted assets but can deliver higher returns for savers. Alongside securing more money for retirees, the aim was to support smaller UK companies to drive up economic growth.

The fund is planned to invest in private firms, including green energy, windfarms and solar, property and small businesses. While there are about 1,900 companies listed on the London Stock Exchange, there are almost 36,000 medium-sized firms in Britain.

The plans are broadly supported by Labour, which is also focused on driving up private investment in the UK economy. The chancellor, Rachel Reeves, said she welcomed the two FTSE 100 firms’ announcement.

“We want pension fund money to work harder for people and the economy. That’s why our pensions review will explore how we can unlock even more investment in the UK economy while boosting pension pots.”

Future Growth Capital will launch with an initial £1bn in pension money committed by Phoenix Group, which will be managed in partnership with Schroders, with plans for the pensions and insurance firm to allocate up to £2.5bn over three years. It will invest in the UK and globally.

Phoenix Group intends to invest 5% of its relevant savings products on behalf of policyholders, worth about £50bn from defined contribution pensions pots, where unlisted assets could deliver better returns than traditional equity investments.

Andy Briggs, the chief executive of Phoenix Group, said: “Pensions savers in the UK had received lower returns than their counterparts in countries including Australia and Canada, partly because they allocated less money to private assets than other similar developed economies.

“By forming Future Growth Capital with Schroders, it will help us to deliver our goal of giving UK long-term savers a way to invest in a more diversified portfolio with the potential for higher returns, from a broader range of assets.”

Peter Harrison, the chief executive of Schroders, said: “By connecting long-term savers with our country’s most inventive companies, Future Growth Capital will help more people to fund a secure and comfortable retirement, whilst supporting businesses to grow and thrive right here in the UK.”