Unlock pension power to unleash the economy of the future

But what if you wanted to boost your return on investment by also exposing some of your pension to smaller, more dynamic, growth-stage companies with higher potential returns, and with a greater skew to the country where you live and work? 

There is a whole host of innovative, privately held UK businesses that would benefit from growth capital and, in turn, boost the prospects of a typical pension fund. They would also help to power the domestic economy.

This is about unlocking investment for innovation

It’s hard to expose your pension to growth-stage businesses

As things stand, it is safe to suggest that savers with 30-40 years ahead of them — and that is the vast majority in auto-enrolment schemes — are all going to be poorer when they retire as their investment returns will not have been fully maximised. 

Outside of a few proactively managed, and now legacy, defined benefit schemes, it is difficult to get exposure to growth-stage businesses, private equity or venture capital in a pension, unless you are especially financially savvy and in all likelihood a wealthy investor. 

But why should the average pension saver be denied the opportunity to invest in the latest life sciences innovator, or an up-and-coming e-commerce platform? More to the point, why should fast-growth businesses be prevented from accessing long-term pension scheme investment, precisely at the point when they need it most — when they are growing fast?

The charge cap is a hurdle

The government recently closed yet another consultation on pension fund reform, with outcomes set to be revealed imminently. We are at a critical moment when we can make structural regulatory driven changes to the pensions system that will define how institutional capital is deployed in the UK.

The problem to overcome is the way charges are capped in defined contribution schemes. While the cap legitimately protects consumers from charges that are too high, a major and unintended consequence is that fund managers are unable to offer pension members a broader investment mix, specifically some exposure to scale-ups and unquoted companies.

A FTSE 100 investment fund is cheap to run. A fund of growth-stage, possibly unlisted equities is expensive because it is far more labour intensive. It takes more research, more time, and more effort. 

Fund managers cannot afford to offer this kind of fund within the limits of the charge cap, and so unsurprisingly do not do it. The net returns from DC schemes in the years ahead will reflect low-cost, low-risk, low-ambition and low absolute return.

Removing the charge cap altogether would be wrong and might lead to a range of different unwanted consequences. Instead, we should seize the moment and add a focused exemption to the current rules that would allow a wider investment mandate and specifically performance fees to be charged in limited, specific circumstances. 

This exemption would make it financially viable for DC schemes to channel some of their investment to high-potential growth-stage businesses. Done with sufficient care, it would also protect consumers while delivering higher long-term returns.

The criteria for exemption could include the need for funds to only make minority investments in a cadre of small and medium-sized companies that are based in the UK and with a longer average hold period. 

Exempted funds would consider ESG

At BGF, we would additionally propose that exempted funds should have environmental, social and governance principles at their core, should make the majority of their investments outside London and the South East, and should target businesses in sectors identified as critically important by the government, such as life sciences, artificial intelligence, and of course sustainability.

Within this criteria, any pensions reform would serve the wider interests of the country and facilitate investment into businesses that are contributing to a positive, sustainable future. 

This is about unlocking investment for innovation — the life sciences businesses that will develop the next vaccine, the robotics companies tackling autonomous transport, the climate innovators that will get us to net zero.

Our research identified 21,000 scale-up businesses in the UK — dynamic, fast-growing, but yet not listed and therefore outside the grasp of the average pension scheme member. 

These businesses represent our future as a nation. They represent better returns for everyday savers, increased jobs and productivity across the UK, and the exciting innovation we need to solve the biggest problems of the day.

At the height of the pandemic last year, the historian Sir Anthony Seldon and I highlighted the pressing need to unlock the UK’s institutional capital to invest in these growing companies. While promising noises have been made in this direction, it is time for concrete action. 

This means, as a crucial first step, breaking down the well-intentioned but stifling barriers that inhibit pension scheme members from gaining exposure to growth-stage businesses. 

It is time to let individual scheme members use their financial power to help solve the urgent challenges we face, such as the transition to net zero. And it is time to do that now. 

Stephen Welton is founder and executive chairman of BGF