ECOMING BY THE standards of OECD, a club of predominantly rich countries, Great Britain has a nest egg. In 2020, the organization’s pensions report valued the country’s prize pool at $ 3.6 billion, just behind America out of 37 members. Much of that is earmarked for workers who will not retire for decades and hope it will have increased by then. So how should it be invested in the meantime?
In recent years, regulation has focused on cost containment. In 2016, wary of fund managers who nibble away at workers’ retirement savings with disproportionate charges, the government introduced a cap. Workplace pension plans were limited to investing in funds with annual fees of 0.75% or less.
This looks set to change. Hoping for a chance to redirect pension assets towards the government’s “leveling” ambitions, the Prime Minister and Chancellor of the Exchequer wrote to pension administrators in August urging them to launch a “big bang of investment” . By investing in unlisted UK assets like green infrastructure and innovative start-ups, trustees could ensure that their savers “enjoyed the rewards of money.” UK ingenuity and enterprise ”, ensuring better returns and at the same time supporting British successes.
In practice, this would mean that pension plans would invest less in listed stocks and bonds, and more in venture capital and infrastructure funds. The problem is the cost limit. Such funds tend to charge more than 0.75% per annum plus a profit share once the returns exceed a “hurdle” rate. And so, Treasury officials would be looking for ways to loosen the cap.
There is certainly room for more investment. A report by the government-funded British Business Bank (BBB) found that less than a fifth of UK venture capital between 2010 and 2019 came from pension funds. This compares to over 70% in America. Much of the funding gap has been filled by agencies like the European Investment Fund and the BBB.
Meanwhile, workers saving for retirement are missing out on an asset class with higher returns. The British Private Equity & Venture Capital Association, an industry body, estimates that member-managed funds averaged 14% per year over the decade through 2019. This compares to an average of 8% per year. year by FTSE All-Share index of listed UK equities. Yet two-thirds of defined contribution plans, the most common type of occupational pension, do not invest in such assets at all.
That said, raising the fee cap is unlikely to trigger a rush to invest in pension funds, warns Raj Mody of PwC, a consultancy firm. The workers most likely to benefit from high-risk, high-growth investments like venture capital are furthest from retirement. These savers also tend to have the smallest pots. And simply raising the cap will not solve the problem of performance fees for unlisted funds, which can be volatile and dependent on returns. “This is an enabling step, not a solution,” Mody said.
Part of the reason American pension plans can invest in venture capital on a large scale is their size: the five largest funds have combined assets of $ 1.8 billion. This gives them leverage to negotiate costs and makes it economical to hire specialized teams. The closest thing to Britain on this scale is the £ 276 billion ($ 382 billion) of pension assets in its local government pension scheme, which is divided into 90 segregated funds. A big bang might require a greater concentration of the Treasury’s firepower. ■
This article appeared in the Great Britain section of the print edition under the title “Doffing the cap”