techUK responds to DWP’s consultation on enabling investment in productive finance
techUK has responded to the Department for Work and Pension’s consultation on enabling investment in productive finance. The main rationale behind this consultation is to gather input on removing performance-based fees from the charge cap on Defined Contribution (DC) pension schemes in order to lower investment barriers and encourage performance fee innovation and competition.
DC schemes are workplace pension plans in which both employee and employer contributions are invested and the results are used to purchase a pension and/or other benefits at retirement. Although DC Schemes can afford to take a long-term approach to investment, current allocations to alternative assets such as Venture Capital are relatively low, as these schemes' allocations have traditionally been focused on listed equities and bonds.
An explanation of the low allocation of these schemes in VC or Private Equity can be found on the regulation regarding charge caps. The current charge cap prevents DC schemes from imposing charges of more than 0.75% annually on a member’s pot. However, techUK members have stated that variable fees (like performance-based fees), are not suitable for regulation through a flat cap, and that this charge restriction imposed on DC schemes is regarded as limiting schemes' ability to engage in long-term, illiquid assets such as venture capital and other kinds of private equity.
As a result, techUK supports the DWP’s proposal of removing performance fees from the charge cap for DC pension schemes. If implemented, it would give DC pension scheme trustees more leeway to focus on generating returns for their members rather than concentrating only on the costs. This has the potential of increasing the return on people's savings, while at the same time boosting investment in the tech sector from UK pension funds.
Unlocking the full potential of DC pension schemes
techUK members believe this consultation responds to a real and measurable problem: UK pension savings are being underutilised. This is a problem that many experts believe was inherited from pre-Brexit regulations. Only 0.018% of European assets under management by pension funds schemes (including the UK) are allocated into VC.
However, even within Europe, data from Atomico’s State of European tech 2021 shows that UK and Irish pension funds are the most underinvested in the continent, accounting for only 6% of overall pension fund investments into European VC and representing only 2% of total VC investment raised by UK and Irish VC.
Other countries have taken active action in the use of their pension funds; for example, in the United States, 9 percent of pension assets are directed into private equity, funding companies all over the world. Australia's pension system, which is similar to that of the UK and one of the largest of the world, has 4% of its assets invested in private equity, compared to 0.3% in the UK.
We believe these proposals allow pension scheme trustees to invest in areas where they believe they can provide better value to members, while also encouraging genuine fee innovation and competition. The evidence is compelling in this regard; according to research conducted by the British Private Equity & Venture Capital Association, these kinds of assets have generated 14.2% of average annual returns for pension funds and other investors over the last ten years, outperforming other asset classes.
Unlocking this potential entails increasing investment in highly productive businesses, as well as in companies that will tackle future challenges and provide jobs to the UK economy, while also allowing more citizens (members of DC schemes) to benefit from our high-tech economy's achievements.
This regulation change will be an essential step towards that goal, but we also advise the DWP on the promotion of a cultutal shift that encourages funds to invest in asset classes that support the tech economy. techUK will continue to work with the Government in achieving this goal, as well as to provide feedback on technical consultations such as this one.
techUK’s complete submission on enabling investment in productive finance can be found here.
Neil Ross
As Associate Director for Policy Neil leads on techUK's public policy work in the UK. In this role he regularly engages with UK and Devolved Government Ministers, senior civil servants and members of the UK’s Parliaments aiming to make the UK the best place to start, scale and develop a tech business.