Unlock £50bn pension investments using post-Brexit freedoms, Treasury urged
Post-Brexit freedoms should be used to liberalise pensions and unlock £50bn in tech investment, the Lord Mayor of London has urged the Treasury.
The Government should scrap red tape preventing private pensions from plugging a £15bn per year funding gap backing British business, according to a new report by the City of London Corporation, EY and Innovate Finance, a fintech industry body.
Chancellor Jeremy Hunt hopes to boost Britain’s financial services via his Edinburgh Reforms, a series of regulatory changes made possible now that Britain is outside the European Union.
These plans include proposals to increase the pace of consolidation of defined contribution pension schemes – a move which in his Spring Budget Mr Hunt said was “critical” to bolster retirement incomes and build the next generation of globally competitive companies.
Mr Hunt also has a stated aim of transforming the UK into a “science and tech superpower”.
Nicholas Lyons, Lord Mayor of London, called for rule changes that will allow smaller defined contribution pension schemes to be consolidated, creating economies of scale that will allow greater risk diversification.
In its “Powerful Pensions” report, the City also called for a future growth fund targeting £50bn to provide new investment for the UK’s fintech, biotech, life sciences and green technology sectors.
Its authors estimate that there is a “growth funding gap” of £1.5 trillion that could be used by domestic institutional investors to back creative and innovative businesses, many of which are in the financial, professional service and technology industries.
Only 1pc of the £4.6 trillion held in pensions and insurance assets is invested in unlisted companies, the report’s authors add.
Alderman Lyons warned that businesses are struggling to grow domestically and compete globally because of a shortfall in investment, while pension fund members are missing out on high returns.
Alderman Lyons said: “The UK has the second largest pension fund pot in the world, but UK pension funds invest less in private equity and infrastructure than our competitors.
“We’re missing a trick here – which is leading to the majority of UK pension funds and their scheme members not benefiting from these high growth investment opportunities.”
In lieu of UK pension funds, these investments are being targeted by overseas investors. In 2021, just 22pc of private equity and venture capital funding raised in the UK came from domestic investors.
Axe Ali, UK Private Equity and Venture Capital Partner at EY, said unlocking DC pension funds could be a “game changer” for high-growth tech firms.
“A new Future Growth Fund could help support tech firms with an injection of much-needed capital, whilst also providing a boost to the UK economy,” he said.
“It will of course require collaboration between the financial sector, regulators, and high-growth firms.”
Janine Hirt, chief executive of financial tech trade body Innovate Finance, said that the additional funding could have a profound impact on future generations of consumers.
“The de-equitisation of UK pension funds over recent decades means that upcoming generations are not maximising their investment returns, which will significantly impact them at retirement,” she added. “It is essential that we address this now.”
It comes after a group of City chief executives called on Mr Hunt to free up more investor capital to support UK firms and boost the economy, ahead of his spring Budget.
Earlier this month, the UK Capital Markets Industry Taskforce (CMIT) told the Chancellor there was a “substantial opportunity to deploy more long-term UK pension capital into the growth drivers of the UK economy, delivering better returns for savers and faster growth for the country”.
Several companies have sought listings away from London in a bid to attract more investment from a broader range of investors. Technology group Arm and building materials firm CRH have both detailed plans to float in New York over concerns over low valuations and liquidity, which some commentators have attributed to a lack of backing from pension funds in British firms.