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The Actuary The magazine of the Institute & Faculty of Actuaries

Lack of venture capital investment hitting pension savings

Savers in defined contribution (DC) pension schemes are missing out on higher returns due to a lack of investment in some of the UK’s fastest growing and most innovative companies, a new study has found.

Young savers are being hit hardest ©iStock

In a report published today, the British Business Bank said that an average 22-year-old could enjoy savings growth of up to 12% if their DC pension scheme made a small allocation to venture capital and growth equity funds.

Regulatory, commercial and operational constraints currently hinder venture capital investment in the UK.

However, the report highlights how these barriers can be overcome, and warns that young savers are being hit hardest by a lack of venture capital investment because they have more time to reap the benefits.

British Business Bank CEO, Keith Morgan, said: "It is incumbent on DC pension schemes to consider how to include investments in the UK’s fastest growing and most innovative companies.

“The aim of this study is to enable better long-term retirement outcomes to the UK’s DC pension savers with a focus on commercial solutions that could be implemented in the private sector.”

DC pension schemes typically invest in listed assets, such as equities and bonds, and passive strategies, which are easier and cheaper to manage and trade.

However, the report suggests that increasing venture capital investment could yield significant benefits for older workers too.

It states that a 35-year-old with £25,000 currently invested in retirement savings could see 10% increase, while and a 45-year-old with a £50,000 pension pot could see a rise of up to 7%.

The researchers said that investment consultants, data and analysis providers and trade bodies can better educate DC scheme trustees on the value and nature of venture capital and growth equity funds.

They also called for industry change, arguing that DC schemes can use their scale for good to create pooled investment vehicles and develop reduced fees with DC-centric structures.

The report recommends regulatory changes that facilitate venture capital  investment, while the British Business Bank said it work to improve the quality and availability of industry-level data on historic returns of the asset class.

Simon Clarke, exchequer secretary to the Treasury said: “Pensions savers across the UK deserve financial security in retirement, and this review is a helpful contribution to that.

“We are keen to support pension funds to invest in the UK’s fastest-growing and most-innovative companies, so that all savers can benefit from their success, while at the same time boosting the economy.”

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