Pensions to branch out
Investors may soon be able to invest in young and growing businesses in their pensions, says David Prosser.
Britain's biggest fund managers could soon offer pension-fund savers the opportunity to invest in "patient capital" under proposals unveiled in last week's Budget.
The Treasury, keen to find new sources of long-term funding for the UK's start-ups and fast-growing small companies, has sponsored talks between the British Business Bank and defined-contribution pension providers.
The discussions are aimed at creating new pooled funds through which pension investors could put money into young and growing businesses. Ministers believe pension savers represent a huge untapped market of capital for young businesses that may otherwise struggle to secure funding as they grow.
For savers, meanwhile, the lure is the potential for these small businesses to deliver very attractive returns over the long term provided they make it through the early years.
And on the face of it, the match between pension funds and patient capital is a good fit: savers who are tying up their capital for the long term can afford to bide their time as fledgling businesses work to establish sustainable growth. The rewards for such patience can be substantial. And for those pension savers with significant sums invested in more conventional assets, the additional diversification benefits from patient capital and the exposure to assets with a higher-risk, higher-return profile would certainly be appealing.
It's not for everyone
However, the worry is that some savers could end up overexposed to patient capital. There may be scope for impressive returns, but the failure rates among early stage businesses are very high.
Even in a pooled fund, savers run the risk of suffering substantial losses. In any case, there are already tax-efficient savings vehicles that offer exposure to patient capital, with venture capital trusts and the Enterprise Investment Scheme (EIS) raising hundreds of millions of pounds in recent years. These schemes often attract wealthier savers who have used up their pension contribution allowances.
One final unanswered question relating to this idea is whether or not traditional asset managers actually have sufficient expertise and experience to manage patient-capital assets, or for that matter the right networks to identify potential investments. Many savers would therefore be better off with specialist managers. The government and the City regulator will consult on the issue over the next few months.