A cross-industry initiative comprised of leading figures from the pensions and private capital industries has called for continued focus from the sectors, regulators and government to increase investment in fast growing businesses.
The Pensions & Private Capital Expert Panel has been convened by the British Private Equity and Venture Capital Association (BVCA) and includes leading figures from across the pensions industry including the Association of British Insurers (ABI), the Pensions and Lifetime Savings Association (PLSA), Legal and General (L&G), M&G and NEST.
The panel was established in February 2024 with its focus underpinned by the Mansion House Compact, where 11 of the UK’s largest defined contribution (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 that have committed to working with the pensions industry to clear the pathways to that objective.
The expert panel published its interim report today making several recommendations to the government and regulators in order to increase investment in British businesses.
This includes asking the government to use its incoming Value for Money framework to help support pension funds to move away from short-term cost consideration and focus on long-term returns by DC pensions.
In the report, the expert panel recommended that the Financial Conduct Authority (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.
It pointed out that recent data from the British Business Bank 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.
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.
Permitted links
The expert panel is also calling for the FCA to update specific regulations which it says “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.
It pointed out that 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.
It said that 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.
In addition, the panel said the regulator should also increase flexibility over the use of Non-UCITS Retail Scheme (NURS) products to invest in long-term asset funds (LTAFs), where the rules currently restrict the ability to achieve scale. The FCA’s consultation on this topic was launched on Friday 6 September.
International examples
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 said that the government should learn 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.
Kerry Baldwin, chair of the Pensions & Private Capital Expert Panel and co-founder of IQ Capital, said: “As an investor in deep tech 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.”
She said that 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,” she added.
Michael Moore, chief executive officer of the BVCA, added that getting more DC pension investment in fast growing businesses could be “a game changer” for UK economy by providing finance for some of “our most exciting sectors”.
Julian Mund, CEO 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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