Government explores ways to unlock wave of pension investment
The government is exploring ways to unleash a wave of investment from pension funds into private assets, as it opens an industry consultation today designed to slash red tape.
Department for Work and Pensions announced it would be consulting on potential changes to pension regulation which could unlock funding from defined benefit pensions schemes to flow into so-called illiquid assets, those not traded on the public markets.
In the consultation proposals published today, pensions minister Guy Opperman said savers were missing out on major returns potential offered in illiquids.
“I am firmly of the view that all DC schemes should be considering diversifying their portfolio,” he said.
“For over a decade public market passive investment has been able to deliver strong returns for savers.
This may well continue to be the case in the long-term, but it is right that trustees consider the role that illiquids can play in continuing to deliver the best possible opportunity of a comfortable retirement income for their members.”
The fresh consultation opened today will run until 11 May and follows calls from digital minister Chris Philp this week for pension funds to step up and back more British tech firms.
Government has already consulted on changes this year on plans to loosen a current charge cap on pension money management, which has restricted pension cash from flowing into venture capital (VC) and private equity (PE).
PEand VC firms typically charge higher fees due to the more hands on style of management involved and have therefore been shut out from pension funds.
In its response to the earlier consultation today, DWP said it had received a total of 54 from across investment firms, trade bodies, law firms and individuals, but that opinion was split on the effectiveness of loosening the charge cap in unlocking investment.
Financial services broadly welcomed the firms, it said, but trustees’ service and legal advisory bodies, along with other Master Trusts, were “not convinced that the proposed change was enough to incentivise DC schemes to change their current approach to investing in illiquid assets that come with performance fees”.
Respondents warned that loosening a cap on performance fees, charged when VC and PE firms hit targets, could dilute the charge cap which has so far been successful in protecting savers’ cash
All respondents to the consultations stressed that member protection was paramount and called for any slated changes to have adequate regulatory safeguards in place to protect pension members.
Analysts at investment platform Interactive Investor said today that planned changes to the rules could boost returns but urged caution.
“In theory, these measures should boost retirement outcomes. Boosting long-term capital investment in low carbon infrastructure is the ideal preserve of pension funds who can take ultra-long-term views on what to invest in, because they invest over many decades,” said Becky O’Connor, head of pensions and savings.
“However there is also room for error with these plans, if, for example, any increase in charges to cover the higher costs of more esoteric investments is not eventually met with higher returns from unlocking these new investment opportunities.”
Proposed changes have been a contentious topic in the tech and fintech sectors, with firms and industry leaders calling on government to loosen the rules and fill a major funding gap that is stifling growth.
Ron Kalifa, who masterminded a major review of UK fintech last year, told City PM in February that pension funds had an important role to play.
“There is a £2bn fintech growth capital funding gap in the UK, and as a consequence there are many entrepreneurs who prefer to sell at the growth stage rather than build their businesses and create prosperity and jobs in the future,” he said.
“There is around £6tn in the UK pension scheme alone. A small portion of that could be diverted to high growth tech opportunities which would create jobs, help with levelling up and drive international trade.”
Recent figures from fintech sector body Innovate Finance revealed a dearth of growth capital for fintech firms.
Around $1.6bn was channelled into growth firms last year compared to $7bn for late stage businesses.