• Industry leaders call on government to empower the pensions industry to move away from short-term cost considerations, to long-term returns by DC pensions.
• Expert Panel recommends the FCA updates regulations to clear the way for more long-term investment funds.
• Cross-industry group calls for industry and Government to learn from international peers that have been successful in supporting pension fund investment in private companies.
• Panel will continue to explore different perspectives and considerations in relation to fee structures
• Private capital and pensions industries will continue to work collaboratively to address cultural and technical issues
A cross-industry initiative comprised of leading figures from the pensions and private capital industry is calling for continued focus from both industries, regulators and government to increase investment in fast growing businesses and open up extra options to boost pension saver returns.
Asking Government to use its incoming ‘Value for Money’ framework to help support pension funds to move away from short-term cost considerations and focus on long-term returns by DC pensions is just one of a series of recommendations made by the Pensions & Private Capital Expert Panel.
The Expert Panel which has been convened by the British Private Equity and Venture Capital Association (BVCA) includes leading figures from across the pensions industry including the ABI, PLSA, Legal & General, M&G and NEST.
In an interim report, published today, the Expert Panel recommends that the FCA removes specific regulatory barriers to launching funds. It also calls on government and industry to learn from how other nations have increased investment by DC funds in growth stage businesses.
Short-term cost versus long-term returns
The Expert Panel has called for Government to use its ‘Value for Money’ framework to encourage pension funds to move away from short-term cost considerations, to long-term returns by DC pensions.
Recent data from the British Business Bank[1] demonstrates that private capital funds produce the highest returns on average when comparing alternative UK asset classes. BVCA analysis shows that, since 2001, investors in private capital funds have collectively earned up to 33% more than an equivalent public equity investment.[2]
Progress on the ‘Value for Money’ framework is already subject to consultation, but the Expert Panel believes that prioritising this objective can lead to meaningful change in the approach taken by the market in the coming years. As this will affect all DC schemes, the Panel anticipates that the aggregate impact on improving pension saver retirement outcomes could be meaningful.
FCA should clear the way for more long-term investment funds
The Expert Panel is calling for the FCA to update specific regulations which hinder some efforts to launch funds aimed at helping UK DC schemes to make long-term growth investments that would improve pensions savers’ retirement prospects.
The FCA’s “permitted links” rules currently limit the types of investment vehicle available to the unit-linked life insurance platforms through which DC schemes often invest. Amending those rules to widen the investment vehicle options for DC would encourage industry to provide new ways for UK savers to access the diversification and strong returns offered by the UK’s globally successful private markets.
The regulator should also increase flexibility over the use of Non-UCITS Retail Scheme (NURS) products to invest in LTAFs, where the rules currently restrict the ability to achieve scale. The Expert Panel welcomes the FCA’s consultation on this topic that was launched on Friday 6 September.
Take inspiration from overseas
The Expert Panel identified several successful examples of overseas initiatives that have generated significant investment in sectors such as life sciences, climate and deep tech. It advocates that Government learns from these examples when designing any new initiatives to boost investment in priority sectors. This includes the French ‘Tibi’ scheme, which encourages institutional investors to invest in fast-growing innovative companies. Launched in 2019, the ‘Tibi’ initiative aimed to increase the financing capacity of technology companies by mobilising capital from institutional investors. The scheme has been viewed as a success, exceeding its target to raise €6bn and catalysing €30bn of French investment in the tech ecosystem.
The Expert Panel also explored how UK DC pensions have different perspectives and considerations in relation to fee structures compared to international comparators. The panel agreed that considering fee structures and approaches in commercial discussions would be the appropriate way for private capital firms and pension providers to secure advantageous outcomes for DC savers.
About the Expert Panel
The Expert Panel, established in February 2024, has worked to develop solutions to structural challenges which have resulted in UK pension funds historically investing less in private businesses than international peers. In 2022, UK managed venture capital and growth equity funds received approximately £432m from international pension funds, whereas UK pension fund investment accounted for £48m.[3]
The focus of the Expert Panel is underpinned by the Mansion House Compact, where 11 of the UK’s largest DC pension providers agreed to invest 5% of their default funds under management to unlisted equities by 2030. Separately, the Investment Compact for Venture Capital & Growth Equity has been signed by over 100 venture capital and growth equity firms who have committed to working with the pensions industry to clear the pathways to that objective.
Kerry Baldwin, Chair of the Pensions & Private Capital Expert Panel, said: “As an investor in deeptech for over the last 25 years, and a co-founder of a venture capital firm on our sixth fund, I see the challenge ambitious entrepreneurs and companies have in attracting investment required to scale in the UK, and how often they need to go abroad to secure growth funding.
“The recommendations agreed by the Expert Panel highlight how much consensus there is between the pensions industry and private capital to achieving the Mansion House Compact objectives. Acting on the recommendations set out in this interim report will realise a huge opportunity to deliver better returns for pension savers and provide access to finance for businesses which are solving our biggest challenges across life sciences, medical innovation, deep tech, and climate.”
Michael Moore, chief Executive of the BVCA, said: “Getting more DC pension investment in fast growing businesses could be a game changer for our economy – providing finance for some of our most exciting sectors. It also means pensions savers can benefit from more diversified portfolios and the strong returns private capital can deliver.”
Hannah Gurga, Director General of the ABI, said: “The pensions industry has made great strides to diversify DC schemes to invest more into private capital, following last year’s Mansion House Compact. We’re confident in further progress on this front and key to this is bringing about a culture change in how trustees, benefit consultants and employers view scheme options. We must move away from judging solely on price and focus instead on overall value delivered which will benefit both savers and the economy.”
Julian Mund, Chief Executive of the PLSA, said: “The PLSA welcomes the progress this initiative has made in bringing the pensions and private capital industries together to examine how to overcome some of the practical barriers to investment in this area. This has opened the door for more detailed and productive discussions on suitable investment structures, liquidity requirements and other technical areas in the realm of private markets investing.
“Cost and value will always be significant factors for DC pension schemes, given that well over 90% of savers are in default funds, so we are particularly encouraged by the Panel’s discussions about fees. We look forward to continuing to work on how to make private markets investing more attractive and cost effective for pension funds.”
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[1] British Business Bank, UK Venture Capital Financial Returns 2023, December 2023
[2] BVCA-Performance-Measurement-Survey-2023, July 2024
[3] BVCA: Funding the Future, October 2023
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