The UK government is bringing in a new rule to combine pension funds into eight mega-funds, with the hope of unlocking £80 billion (around $102 billion) in investment capital—a measure broadly welcomed by the private markets.
Labeling it the “biggest set of pension reforms in decades,” UK finance minister Rachel Reeves plans to introduce a new Pension Schemes Bill that will consolidate defined contribution schemes and pool assets from the 86 separate Local Government Pension Scheme authorities across England and Wales.
The combined schemes are expected to manage around £500 billion in assets by 2030.
According to the government’s analysis, pension funds begin to deliver better returns once the size of assets they manage reaches between £25 to £50 billion, as they are then better placed to invest in a wider range of assets, including private equity and venture capital. The new proposal is largely welcomed by the private capital market.
Alliott Cole, CEO at London-based VC Octopus Ventures, is among those who have welcomed the news, saying it would benefit UK companies. “Providing additional sources of funding for these talented entrepreneurs will drive economic growth,” he said.
BVCA, the industry body for the venture capital and private equity sector, also said the move would likely boost domestic investments in the UK.
“Larger, consolidated pension schemes have greater opportunity to invest in higher growth assets, like private capital funds that drive investment into exciting UK businesses whilst delivering strong-returns for pension savers, " said BVCA chief executive Michael Moore."Moving quickly from consultation to concrete proposals and implementation will be key.”
Cautious optimism
Anne Glover, CEO at UK firm Amadeus Capital Partners, responded positively to the development albeit with caveats.
“I cautiously welcome the consolidation [...] as long as further conditions are also met. This includes [the funds] being able to recruit and compensate high-quality asset allocators who know how to invest in riskier asset classes such as venture capital, and not just default into infrastructure,” she said. “The pools should also find a way to accommodate the industry standard fee structures and compensation mechanisms of venture capital, which rely on successful outliers to deliver outstanding performance for underlying investors.”
She also noted the consequential increase in ticket size could drive the exclusion of smaller funds, including those looking at early-stage investments.
Reeves’ proposal follows the Autumn Budget that was delivered last month when she introduced a £40 billion tax increase including higher taxes on capital gains and carried interest.
The UK private market also saw a major reform last year when Reeves’s Conservative predecessor Jeremy Hunt introduced the Mansion House Compact which commits pension providers to allocate 5% of assets in their default funds to unlisted equities by 2030.
Nine of the UK’s largest defined contribution pension schemes were signatories to the compact.
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