For too long the allocation of pension fund investments into UK startups has been the Moby Dick of British growth policy. Not capturing the gains that this white whale could bring hasn’t just hurt startups, it’s hurt savers too.
The pension funds of Canadian teachers have profited more from the success of Silicon Roundabout than our pensioners — or indeed most startup employees themselves.
Thankfully, the obsession of those in the tech ecosystem has been increasingly shared by those in government. The Mansion House speech, which outlined a £75bn boost from pension funds for UK startups, reassures us that far from being lost at sea, Chancellor Jeremy Hunt has reeled in a whopping deal.
The reasons for the movement from all parties involved are clear. It’s not just missed investment opportunities in UK firms that have left a bad taste. Risk aversion in the pensions industry has meant stale returns too. The British Business Bank found that the average 22-year-old could boost their total retirement savings by 7% to 12% with a 5% allocation of their fund to venture capital.
Aligning savers and startups not only boasts superior returns, but also gives the British people a stake in tech companies that will define the decades to come. While American VCs regularly raise nearly 70% of capital from pension funds, it’s less than 20% for UK VC’s.
So it’s welcome news that the chancellor has announced a set of reforms that should help the UK tech ecosystem take its next big steps, including an agreement amongst some of Britain’s biggest pension companies to commit significant investment to private markets.
The rest of the package was pretty exciting too. Reforms are planned to improve rules relating to listings, including simplifying prospectus documents. And, perhaps most notable, the chancellor made clear his support for a new trading platform where private companies can trade their shares for a few days each year without forcing them to commit to the often burdensome requirements of floating on the stock exchange.
Swiss cheese pension market
Startups represent a key part of the solution to Britain’s growth sclerosis. But this is only conditional on them receiving the capital to disrupt incumbents and drive productivity. Those who decry the UK’s public markets as a decaying industrial relic need to look beneath, at the companies building their replacements.
With pension fund capital deployed to back scaleups, we can build a true bridge between idea and IPO. It’s clear that the Treasury has long understood that pensions’ inertia has been the enemy of growth. Now, after years of us working to get the correct vehicles in place, and the pensions industry to the table, it seems things are finally heading in the right direction.
There is still more to be done. The pensions market remains a Swiss cheese with a multitude of schemes under various regulatory frameworks that starve the tech ecosystem of capital — and keeps savers locked into low-returning products. The phasing out of DB pensions has still left vast swathes of capital that can be pooled, modelled on the success of the Pension Protection Fund. More can be done to engender partnerships between VCs and pension funds — here the City of London should be commended for its work. The final piece of the puzzle remains the pots of public sector savings that aren’t even invested.
But the government has set the wheels in motion to recalibrate capital allocation in this country. We have seen how pooling local government pension funds has boosted regional investment; now the tech ecosystem hopes the same will happen at national level, on a far grander scale.
Unlocking pensions to invest in the likes of climate tech and healthtech startups won’t just deliver better public services, higher growth and future innovation in the form of scaleups — it will probably make my retirement that bit easier too. If it does, old-aged me will have the chancellor to thank.
Tal Feingold is investment policy lead at the Startup Coalition.