Policy 10: Unleash pension fund capital by adjusting the pension charge cap
In collaboration with The Coalition for a Digital Economy (Coadec), we have produced a manifesto to make Britain the best place in the world to start and grow a business. It features 21 policies across three key policy areas: access to talent, access to investment, and regulation. We’re sharing the policies on our blog. To read the full manifesto, click here.
For many entrepreneurs, seeking investment from abroad is not a strategic decision — it happens simply because the funds they need to fuel growth are not available in this country. Venture capitalists (VCs) completed £63.7bn of deals in the US but just £5.8bn in the UK in 2017. While the steady flow of investment from overseas can be seen as a vote of confidence in the UK, it does mean that the fruits of the rapid growth delivered by our own startups will be enjoyed offshore.
The government has spent several years examining how to release some of the cash held in Defined Contribution (DC) schemes for investment in fast-growing startups. The next government must follow through on this work as this progressive approach will help the UK to mirror the large amounts of growth capital available in the US and China. In the US, for example, 98% of venture capital funding comes from institutions such as pension funds and insurance companies. This figure stands at just 55% in the UK.
With assets in UK DC schemes expected to exceed £1 trillion by 2029, diverting just 5% of that to venture capital firms would equate to a £50bn funding boost for startups. The British Business Bank has already undertaken a study which found that a 5% portfolio allocation in startup investments appropriately balances against the risks of investing in illiquid assets - thus protecting retirement savings.
Unfortunately DC funds are currently unable to invest in startups, through VCs, because of a statutory 0.75 per cent cap on annual fees. VC fees are significantly higher than passive asset classes with lower returns (equities) due to the costs of managing an unlisted portfolio of companies, which translates into a performance fee.
By adjusting the annual fee cap, to account for performance fees, the next government can unleash this growth capital - hugely benefitting savers at the same time. Research has shown that retirement savings for an average 22-year old could be increased by as much as 7-12 per cent, and the average 45-year old could see an increase of 6-7 per cent. This would ensure that a wider group of people reap the rewards from some of the UK’s fastest growing businesses, rather than the profits remaining concentrated in an ever-smaller group of wealthy investors and institutions.