Budget 2023: Govt seeks to catalyse DC investment in innovation
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The government is seeking feedback from defined contribution schemes, consultants and asset managers on its Long-term Investment for Technology and Science initiative announced by chancellor Jeremy Hunt on Wednesday. Feedback can be provided until 28 April.
The government said it “stands ready to make an initial commitment of up to £250m through LIFTS to mobilise DC pension scheme investment into the UK’s science and technology sector”. It wants to get the views of schemes and service providers to explore delivery options, which include:
- Investment collaboration and information exchange with British Patient Capital, a commercial subsidiary of the British Business Bank
- Pari passu co-investment (via BPC)
- Co-investment with capped returns for government (potentially through a part of BBB other than BPC)
- Management fee offset mechanism, with the government expecting institutions to reimburse the cost of reduced management fees once the investment achieves a defined hurdle rate.
The invitation for feedback document states that LIFTS is “a major opportunity to ensure that members of UK DC pension funds stand to benefit from the higher potential returns possible through investment in our most innovative, high-growth companies”.
Illiquid investments often have higher potential returns but can come with higher risk than more liquid assets. The collapse of Neil Woodford’s funds of unlisted stocks in 2019 left about 300,000 investors facing losses. DC trustees must invest in the best interests of their members, minimising risk whilst maximising outcomes.
The government said that UK DC pension schemes currently hold over £500bn of assets and that this is set to double by 2030.
“Currently, these schemes are under-invested in venture capital and growth equity relative to comparators such as Canada and Australia, despite the significant opportunity to enhance returns for their members and diversify their portfolios,” business and trade secretary Kemi Badenoch and Hunt said.
Central government has been looking to direct UK pensions money towards UK plc and infrastructure for years, in the hope of addressing low growth since the 2008 financial crisis. In 2015, the Treasury mandated asset pooling for local authority funds to facilitate infrastructure investment.
More recently, the department had the Financial Conduct Authority come up with a fund vehicle that allows DC schemes easier access to illiquid assets, the Long-Term Asset Fund, and it has legislated to remove performance fees from the default charge cap of 0.75%. The charge cap has the aim to protect pension savers from high fees.
Will the proposed solutions catalyse private sector allocations from DC schemes?