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SCIENCE PROGRAMME

Pension Power

Unlocking the UK’s pensions for science and tech growth
Zachary Spiro, Allan Nixon
November 16, 2023
Pension Power

“Future economic growth will be powered by the science and technology sector, and the UK is well placed to take on a global leadership role. But underinvestment by UK pension schemes is holding us back. The UK must go much further to unlock this untapped potential and this welcome report from Onward highlights numerous sensible ideas to do that.”

The UK has a chronic pension investment problem, leaving British innovators cash-strapped and preventing savers from cashing in on successful start-ups. Britons’ retirement savings make up a mere 10% of the UK venture capital pool, while pensions account for 72% in the USA. Compared with other nations, the UK’s fragmented, short-sighted pension industry invests fifteen times less in start-ups than Canada, nine times less than the USA, and four times less than Australia.

The UK’s pension industry isn’t working for savers or start-ups. The average British pension returns are a third lower than in the USA, Canada and Australia, meaning savers are losing tens of thousands of pounds. Fledgling science and technology firms in the UK face a £6 billion funding shortfall, with too many cutting-edge innovators and entrepreneurs moving abroad, listing on foreign stock exchanges or folding due to a lack of investment. 

If the UK wants to realise its science and technology superpower – and ensure British innovation benefits British savers – it must resolve its pensions investment problem. Onward’s new paper, Pension Power, urges the Government to create a Science Superpower Fund to act as a vehicle for local Government and other smaller pension schemes to invest in UK science and technology firms via the British Business Bank. It also calls for the Chancellor to invest £3 billion a year to help pay for public pensions and double the Mansion House Compact’s ambition. 

These proposals, among others, could close the UK’s scientific funding gap by unlocking £20 billion of investment every year. Generations of British savers would reap the rewards of successful UK companies, boosting their pension savings and supporting more comfortable retirements. If UK pension returns were as high as their US, Canadian or Australian equivalents, a typical saver with annual contributions of £1,600 per year over 35 years would have an additional £97,900 when they retired.



Barriers preventing pension investment 

Consolidation

The UK direct contribution pension market is dominated by a large number of very small funds that are unable to invest in venture capital. As of 2023, there are more than 27,000 different pension schemes, of which more than 25,000 have fewer than a dozen members. With over £100 billion of cash in these small funds – almost half of the UK’s occupational Defined Contributions sector – the market is too fractured to support UK science and technology. Even at the current rate of consolidation, it will take another quarter of a century for the smallest schemes to wind up.

Culture

The UK pension market is intensely focused on keeping administrative costs down, even at the expense of long-term growth for savers. As fees for venture capital are typically higher, even larger funds will refuse to invest in those assets. Average industry fees for large funds are almost half the regulator-set maximum, yet performance among the largest funds is only 64% of equivalent US, Canadian or Australian pensions. Pension firms claim that industry-wide practices, such as being able to sell assets at short notice, get in the way. Regulators dispute this and have explained how this can be overcome.

Capacity

Despite being the most developed sector in Europe, the UK investment industry remains too small to deploy capital on the scale of America. Adjusted for size, UK venture capital is only 60% the size of the US equivalent. As a result, interventions must accommodate expansion in capability so the industry can deploy the investment needed by UK science and technology firms.

Recommendations

1) The Government should create a ‘Science Superpower Fund’ to channel funds that are unable to invest in venture capital (including smaller pension schemes, public sector pensions, and private individuals) toward science and technology firms via the British Business Bank.

2) The Government should offer a time-limited tax credit to incentivise smaller pension funds to consolidate, with increasing generosity the fewer members the funds have.

3) The Government should establish a “Science and Security Mandate” requiring UK venture capital firms to issue statements on their UK and international technology strategy.

4) The Government should benchmark the net performance of default pension options against a regulator-defined international composite of funds.

5) The Government should also benchmark the asset allocation of default pension options against a regulator-defined international composite of funds.   

6) The Government should require default pension options that significantly underperform their benchmark to issue communications setting out, in cash terms, how much better off savers would be if they had invested their pension with a different firm.

7) The Government should double the Mansion House Compact ambition to 10% invested in illiquid assets.

8) The Government should amend pension regulations so that pensions trustees consider fees in the context of net returns and the impact of their approach to liquidity on their investment choices.

9) The Government should commit to contributing £3 billion to public sector pension schemes over the next 10 years, allocating 20% to growth capital. 

Barriers preventing pension investment 

Consolidation

The UK direct contribution pension market is dominated by a large number of very small funds that are unable to invest in venture capital. As of 2023, there are more than 27,000 different pension schemes, of which more than 25,000 have fewer than a dozen members. With over £100 billion of cash in these small funds – almost half of the UK’s occupational Defined Contributions sector – the market is too fractured to support UK science and technology. Even at the current rate of consolidation, it will take another quarter of a century for the smallest schemes to wind up.

Culture

The UK pension market is intensely focused on keeping administrative costs down, even at the expense of long-term growth for savers. As fees for venture capital are typically higher, even larger funds will refuse to invest in those assets. Average industry fees for large funds are almost half the regulator-set maximum, yet performance among the largest funds is only 64% of equivalent US, Canadian or Australian pensions. Pension firms claim that industry-wide practices, such as being able to sell assets at short notice, get in the way. Regulators dispute this and have explained how this can be overcome.

Capacity

Despite being the most developed sector in Europe, the UK investment industry remains too small to deploy capital on the scale of America. Adjusted for size, UK venture capital is only 60% the size of the US equivalent. As a result, interventions must accommodate expansion in capability so the industry can deploy the investment needed by UK science and technology firms.

Recommendations

1) The Government should create a ‘Science Superpower Fund’ to channel funds that are unable to invest in venture capital (including smaller pension schemes, public sector pensions, and private individuals) toward science and technology firms via the British Business Bank.

2) The Government should offer a time-limited tax credit to incentivise smaller pension funds to consolidate, with increasing generosity the fewer members the funds have.

3) The Government should establish a “Science and Security Mandate” requiring UK venture capital firms to issue statements on their UK and international technology strategy.

4) The Government should benchmark the net performance of default pension options against a regulator-defined international composite of funds.

5) The Government should also benchmark the asset allocation of default pension options against a regulator-defined international composite of funds.   

6) The Government should require default pension options that significantly underperform their benchmark to issue communications setting out, in cash terms, how much better off savers would be if they had invested their pension with a different firm.

7) The Government should double the Mansion House Compact ambition to 10% invested in illiquid assets.

8) The Government should amend pension regulations so that pensions trustees consider fees in the context of net returns and the impact of their approach to liquidity on their investment choices.

9) The Government should commit to contributing £3 billion to public sector pension schemes over the next 10 years, allocating 20% to growth capital. 

Zachary Spiro, Policy Fellow at Onward, said: “UK pensioners should be profiting from British innovation. The fact that they aren’t limits both our economic potential and our long-term savings. These proposals will tackle the big barriers to investment by pension firms, making sure that UK retirees benefit from home-grown companies as much as Canadian or American savers.”

 

Allan Nixon, Head of Science and Technology at Onward, said: “Pioneering science and technology start-ups need access to venture capital for longer as they innovate. The chronic underinvestment by UK pension pots means that too many British innovators fail or are forced to move overseas to find funding. Reforming pensions to unlock investment is critical to the Government achieving its science superpower ambition.” 

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