Retirement savings for the average 22-year old could be increased by as much as 7-12 per cent if schemes made a small allocation to venture capital and growth equity funds. This is according to The Future of Defined Contribution Pensions, a new report published today by the British Business Bank and global management consultancy, Oliver Wyman.
The report provides an in-depth assessment on the case for defined contribution pension scheme investment in venture capital and growth equity, identifies the key risks and challenges to access, and proposes potential solutions to overcome these.
Benefits to pension savers
The report concludes that defined contribution investment in venture capital and growth equity may be especially important for younger savers in their twenties, whose long-term saving horizon may allow them to benefit most.
According to data analysed, even for older workers, the potential increase in returns could be significant. For example, a 35-year old with £25,000 currently invested in retirement savings could see a six to 10 per cent increase in their lifetime retirement savings and a 45-year old with a £50,000 pension pot could see a six to seven per cent increase
Investing in venture capital and growth equity funds
Following auto-enrolment, over 70 per cent of employees now save into a pension with more than 90 per cent of active savers outside the public sector saving in a defined contribution pension scheme.
Typically, defined contribution pension schemes invest in listed assets, such as equities and bonds, and passive strategies, which are easier and cheaper to manage and trade. Many of the most innovative and highest growth companies are not publicly listed but instead receive their funding from private venture capital and growth equity funds.
With defined contribution schemes currently only investing a small amount in alternative assets such as venture capital, the study concludes that pension savers may be missing out on opportunities for better returns. These low allocations have historically been due to the regulatory, commercial and operational environment in which DC Schemes operate. However, this report shows these can be overcome.
Keith Morgan, CEO, British Business Bank said: “The aim of this study is to enable better long-term retirement outcomes to the UK’s defined contribution pension savers with a focus on commercial solutions that could be implemented in the private sector. It is incumbent on defined contribution pension schemes to consider how to include investments in the UK’s fastest growing and most innovative companies.”
John Whitworth, Partner, Oliver Wyman said: “Our in-depth analysis shows for the first time that those saving for retirement – particularly young adults – could see a big increase in their pension pots if more money is invested in the companies of tomorrow. As venture capital funds represent those companies currently transforming our society and shaping our future, it stands to reason that as they innovate and grow, so should the return on investment for pension savers.”
Feasibility study recommendations
For venture capital and growth equity investment to become viable on a mass scale for defined contribution schemes, access to the asset class needs to be improved. The Future of Defined Contribution Pensions report is making the following four recommendations:
1. Information: The British Business Bank, supported by the BVCA and venture capital and growth equity funds, will continue to work to improve the quality and availability of industry-level data on historic returns of the asset class;
2. Education: As data improves, investment consultants, data and analysis providers and trade bodies can better educate DC scheme trustees on the value and nature of venture capital and growth equity funds;
3. Regulation: Prioritise regulatory changes to facilitate venture capital and growth equity investments;
4. Industry Change: DC schemes can use their scale for good to create pooled investment vehicles and develop reduced fees with DC-centric structures.
Simon Clarke, Exchequer Secretary to the Treasury said: “Pensions savers across the UK deserve financial security in retirement, and this review is a helpful contribution to that. We are keen to support pension funds to invest in the UK’s fastest-growing and most-innovative companies, so that savers can benefit from their success, while at the same time boosting the economy.”
About the study
Building on the work of the Patient Capital Review, the study was launched by the Chancellor of the Exchequer at Autumn Budget 2018, when some of the UK’s largest defined contribution pension providers committed to explore options for pooled investment in patient capital. The Defined Contribution Pensions Scheme Feasibility Study Steering Panel was chaired by the British Business Bank and included Aviva, L&G, NEST, Tesco Pension Fund and HSBC. The feasibility study has analysed the performance of over 5,000 funds globally and completed interviews with experts from more than 50 organisations across the pensions and venture capital and growth equity sectors, as well as regulators and those in government.
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