Increasing productive investment through pension allocation in private capital

The issue of getting more UK pensions fund investment into private capital is one the BVCA has long championed. However, it has become something of a hot topic in recent years, with both the last and the current Government increasingly seeing that it's a conundrum that, if resolved, provides solutions to two challenges keeping them up at night: the lack of UK growth and a pending retirement crisis. 

The relationship between private capital and pension funds is actually long established – in fact some of the largest firms in the BVCA’s membership originate from Defined Benefit pension funds. However, as Defined Contribution (DC) replaced Defined Benefit (DB) as the main means of paying workplace pensions, the industry moved towards safer, more liquid investment options, and away from private capital.

The reasons for this are numerous and often complex. But the outcomes are clear: less UK pensions investment into private capital, less growth, and a growing recognition that today’s workers will not have sufficient retirement pots. 

The BVCA does not agree that this is an inevitable consequence of a DC system. Indeed, the DC ‘supers’ in Australia are significant investors in UK private capital funds. And the Government agrees with this view. In his recent speech to the Pensions & Lifetime Saving Association conference, Pensions Minister Torsten Bell noted that “Now why do I focus on enabling productive investment? Because we do so little of it. DC pension funds allocate 3% to infrastructure and 0.5% to private equity. That compares to an 11% infrastructure allocation in Canada, and 5% to private equity in Australia”.

In 2024, on the back of some of the largest UK pension funds committing to investing more in unlisted equities, the BVCA formed the Pensions & Private Capital Expert Panel, to work out how. Last week the panel published its final report, setting out recommendations for regulatory reform, a new Government programme of investment, and new guidance to help pension funds navigate the private capital landscape.

There is no quick solution to this, but we’re already seeing progress – more of our members are telling us they’re speaking to pension funds, and more pension funds are committing to ensuring their members enjoy the benefits of private capital returns. 

Over the coming months the BVCA will continue to engage with Government, regulators, and the pensions industry to take forward the panel’s recommendations. The Government has also committed to a Pension Schemes Bill this summer to implement consolidation across the sector – a BVCA manifesto ask from the 2024 General Election. 

In September the BVCA will host its second Pension Investment Summit, bringing together senior people from across the two industries to discuss progress and areas of further collaboration. There remains much to do, but there is real momentum, and huge opportunity for lasting change.

For more information on this, please get in touch.
 

Authored by Karen Hurst
Access to Capital Policy Manager, BVCA