The UK government’s plans to mobilise up to £80bn in pension fund capital into “megafunds” could fill a void in the country’s tech sector, say startup groups and investors.
This evening, in an address to business leaders at Mansion House in London, the UK finance minister Rachel Reeves will announce plans to consolidate fragmented pension fund schemes across the country to boost investment into new businesses and critical infrastructure — including VC funds.
The idea of tapping into pension funds to increase funding for private companies first came under the previous UK government, when it announced that major defined contribution (DC) funds had agreed to raise investment in UK businesses.
While that was a voluntary commitment from some pension fund companies, Reeves’s proposed reforms are a commitment to make significant regulatory change.
“Pension fund reforms are one of the biggest growth levers the Treasury can pull,” says Dom Hallas, Executive Director of lobby group Startup Coalition. “Once it’s delivered we should see billions more into the British venture-backed tech ecosystem — which is not only good for founders, it’s good for the pensions of British workers too.”
Mobilising pension “megafunds”
The thinking is that while pension funds manage huge sums in assets — Local Government Pension Scheme (LGPS) and DC funds are set to hit £1.3tn in assets under management by the end of the decade, according to the government — very little of that is invested into private companies.
The previous UK government said that DC pension funds in the UK invest less than 1% of their assets in unlisted equity.
The proposed pension fund reforms would consolidate and pool assets from DC schemes — which are pension schemes run by companies like Aviva, Nest and Legal & General — as well as 86 separate LGPS authorities to create “megafunds” run by professional fund managers.
The government said that its analysis showed that pension funds drive better returns once their assets under management reach between £25bn-50bn.
Reeves will call the changes the “biggest set of reforms to the pensions market in decades” and said it could “unlock tens of billions of pounds of investment in business and infrastructure”.
The government has said it’s looking to “mirror” set-ups in Canada and Australia, who have long been lauded for pumping cash into private businesses.
Canadian Pension Plan Investments invested $300m in UK scaleup Octopus Energy in 2021, larger than the total investment by UK pension funds into UK startups in all of 2022. Australia pension funds invest 10 times more in private equity companies compared to DC funds in the UK, according to the government.
Germany also recently announced a pension fund-backed initiative to pour €12bn into its startup scene. In the US, pension funds invested $7.7bn into VC in 2023.
The FT reported that Reeves rejected options like creating one single Canadian-style fund out of the UK’s LGPS.
Good times
Many in the tech sector see the proposed changes as good news for a UK startup scene that found itself a little unsettled by Reeves’s Autumn Budget last month.
“These reforms are a hugely welcome sign that the Government intends to take important long-term decisions to boost investment and growth,” says Michael Moore, chief executive of VC lobby group British Venture Capital Association (BVCA).
Marc Bouchet, senior investment associate at TDK Ventures, says that “historically, Europe’s hamstringing of pension funds’ ability to build portfolios that include risky asset classes like venture capital has been a net negative for founders”.
He adds: “When VCs have institutional investor LPs [like pension funds] who are purely seeking risk-adjusted returns — rather than government funds or private investor schemes as we see in the UK and broader European landscape — those VCs can deploy capital that has a single purpose, fully incentive aligned with the best entrepreneurs: maximise returns, or fail”.
The proposed changes “will help to ensure the UK remains globally competitive and at the forefront of innovation,” says Carolyn Dawson, CEO of Founders Forum Group and Tech Nation.
She adds that economic growth “can only come from strategic long-term investment in the companies and industries that can deliver mega returns, such as technology and innovation”.
When will startups feel the benefits?
Anne Glover, CEO of Amadeus Capital Partners, says the success of the scheme depends on the details of how the megafunds are set up.
“This includes [the megafunds] being able to recruit and compensate high quality asset allocators who know how to invest in riskier asset classes such as VC — and not just default into infrastructure,” she tells Sifted.
She adds that the funds also need to find a way to accommodate VC fee structures and compensation mechanisms, “which rely on successful outliers to deliver outstanding performance for underlying investors”.
It will likely be some time before the UK’s tech companies reap the rewards from pension scheme reform.
The Pension Schemes Bill will make its way through parliament next year, but before then the government will consult with DC funds on setting minimum size requirements for investment alongside measures to facilitate consolidation into megafunds.
“We’re not going to see the effects immediately, but today is a good day for startups,” says Hallas.
Read the orginal article: https://sifted.eu/articles/pension-reforms-uk-investment-news/
