Lord Mayor: DC funds hold UK's future growth in their hands

Defined contribution (DC) pension funds offer the key to turbocharging the growth of the UK’s fintech sector, according to Nicholas Lyons, Lord Mayor of London, speaking at DG Publishing’s DC Strategic Summit on Monday 15 May.

Lyons gave a speech on a recent report from the City of London Corporation that outlined that despite having the second largest pension market in the world, UK pension funds invest less in private equity and infrastructure than other developed nations.

“DC pension funds…have an absolutely crucial role to play,” said Lyons. “It’s important that we all recognise the UK is bursting with creativity with enterprise and with innovation.

“This is a great country to start a tech business and these are the businesses of the future.”

Build it and returns will come

UK pension funds invest less in private equity and infrastructure than other nations not only as a result of regulatory barriers, but other structural issues, such as the widely diversified nature of the pension system, said Lyons, who believes these obstacles are surmountable, but they must be overcome by pension funds.

Lyons is calling for the establishment of a £50 billion future growth fund, that would channel investment into high growth firms.

“Such a fund that over time, allocates perhaps as much as 5% of pension contributions, would mean that we can share the risks and share the benefits and would give millions of people a stake in the businesses of the future, a stake in the intellectual property of the UK,” said Lyons.

“It would also mean that innovation that started in the UK can stay and grow in scale here, too.”

Working with government on building consensus

Lyons said he had been asked by the chancellor, and working closely with the Treasury, to build a consensus around DC funds allocating 5% of their assets over time into unlisted equity.

The government is also being encouraged to consider ways to assist schemes, such as tax incentives and changing requirements on pension trustees.

“This will give a much needed boost to our growth economy. But crucially, it will benefit DC pension funds as well as they will reap the rewards and help build better and more resilient funds for policyholders helping everyone to finance their own futures,” said Lyons.

No time like the present

On a question from the floor as to whether funds were ready for such investments, Lyons was frank: “Probably not,” he said, “ but we had better start getting ready for it, because we can’t carry on with a situation where the future of the productive industries in our country cannot get funding.”

Of the £4 trillion invested in the UK pension system, only 7% is invested in unlisted securities, said Lyons, across infrastructure, real estate, private debt, private equity, including venture capital.

In the seven largest pension funds – including those in the UK – that percentage average is not 7%, but 19%.

Including the most successful pension systems in the world, such as the Canadian and Australian models, it ranges between 20% and 35%.

“Some of the most successful pension pots or sovereign wealth funds invest very heavily in these asset classes,” said Lyons.

“I’m not suggesting we allocate 5% to venture capital, but make it easy. Let’s create a future growth fund, which we can all invest in, so that we’re all in the same boat.

“We need to create an ecosystem of excellence in this space. The future growth fund sits at the heart of that, and is the catalyst for driving it. Without doing something like this, we’re just going to carry on doing what we’re doing and never give our policyholders access to this sort of asset class.

We need to create an ecosystem of excellence in this space. The future growth funds sits at the heart of that, and is the catalyst for driving it

Nicholas Lyons, Lord Mayor of London