The government wants pension funds to help replenish them
E.VES OF THE Standards of OECD, a club for most of the rich countries, Great Britain has quite a nest egg. In 2020, the organization’s pension report estimated the country’s pot at $ 3.6 trillion, second only to America out of 37 members. A significant portion of this is earmarked for workers who have not retired for decades and hope that by then they will have grown. So how is it going to be laid out in the meantime?
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In recent years, regulation has focused on keeping costs down. In 2016, the government introduced a cap because it was wary of fund managers gobbling up workers’ retirement plans with inflated fees. The company pension plan was limited to investment in funds with an annual fee of no more than 0.75%.
That seems to be changing. The Prime Minister and the Chancellor of the Exchequer saw an opportunity in August to divert pension funds towards the government’s “leveling ambitions” and wrote to the pension administrators calling on them to start an “investment big bang”. By investing in unlisted UK assets such as green infrastructure and early-stage innovative businesses, trustees have been able to ensure that their savers are âenjoying the fruits of the United Kingdom Ingenuity and Entrepreneurship âto ensure better returns while supporting UK success stories.
In practice, this would mean that pension funds would invest less in listed stocks and bonds and more in venture capital and infrastructure funds. The catch is the fee cap. Such funds usually charge more than 0.75% per year plus a profit share as soon as the returns exceed a “hurdle”. And so Treasury officials are reportedly looking for ways to ease the cap.
There is certainly room for further investment. A report by the government-funded British Business Bank (BBB) found that between 2010 and 2019, less than a fifth of UK venture capital funding came from pension funds. That compares to over 70% in America. Much of the funding gap was covered by agencies such as the European Investment Fund and the BBB.
Meanwhile, workers who save for retirement are missing out on an asset class that generates higher returns. The British Private Equity & Venture Capital Association, an industry association, estimates that funds managed by its members have returned an average of 14% per annum for the decade to 2019 FTSE All-share index of UK listed stocks. Yet two-thirds of defined contribution systems, the most common form of company pension, do not invest in such assets at all.
However, an increase in the fee cap is unlikely to trigger a rush to invest in pension funds, warns Raj Mody of consulting firm PwC. The workers who are most likely to benefit from high-risk, high-growth investments like venture capital are those furthest away from retirement. Such savers also tend to have the smallest pots. And simply increasing the cap will not solve the problem of unlisted fund performance fees, which can be volatile and return-dependent. “It’s an empowering step, not a solution,” says Mr. Mody.
One of the reasons American pension systems can invest heavily in venture capital is their sheer size: the five largest funds combined have assets of $ 1.8 trillion. This gives them the opportunity to negotiate fees and makes it economical to hire specialist teams. The UK is closest to this size with the $ 276 billion. A Big Bang could require greater concentration of the Treasury’s firepower. â
This article appeared in the UK section of the print edition under the heading “Doffing the cap”