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On the Hunt for growth, UK pension funds must protect their savers

Two old age female pensioners sitting on a seat chatting about their pension money in Dundee, UK

The chancellor presented an ambitious plan to boost domestic investment in UK startups, but its targets should tread carefully

Bringing pension funds into the quest to save London’s public markets requires a careful balancing of priorities.

The government wants to keep UK start-ups in the country to secure jobs and economic growth; while pension providers’ are tasked with ensuring their savers have enough money for retirement. Reworking the system in a way that will allow both simulataneously is an ambitious task.

This week chancellor Jeremy Hunt introduced a plan he believes can achieve this. Nine of the biggest defined contribution pensions schemes in the UK — Aviva, Scottish Widows, L&G, Aegon, Phoenix, Nest, Smart Pension, M&G, and Mercer — agreed, signing the Mansion House Compact, a commitment to invest 5% of their funds in private equity by 2030.

In total, these providers manage more than £400bn in assets and make up around two thirds of the UK's defined contribution market. The investing potential of all of the country's pension schemes, if they were all to join the agreement, could rise as high as £50bn over the next six years, the government estimates. That would all go into into unlisted UK growth companies, and encourage them to commit to the UK.

To lead by example — as Hunt outlined in his speech on Monday— local government pension schemes will aim to double their allocations in private equity to 10%, which could mean another £25bn of inflows by 2030.

Importantly, and by design, this commitment will substantially increase the amount of funding available to UK companies. In 2022, around £22bn of venture capital was deployed in the UK, according to the government Venture Capital Unit. Most of this money came from the US, Canada, Europe and Asia.

Following the reforms it is unlikely that foreign investment will simply back off and allow UK pension funds to step in for all the best action. Investors won’t just disappear and companies can’t be expected to shun offers for patriotic reasons. The potential for government protectionism is there, but UK pension funds will likely be forced to compete with those foreign buyers over the very same growth businesses the UK so justifiably wants kept in British hands.

And more demand with the same supply tends to mean higher prices. It is possible that higher-than-reasonable valuations in the private market will neither benefit the saver who overpays for them nor encourage companies to go public in the UK.

The government is aiming to reach a 12% increase in size for pension pots, or an additional £1,000 per year per person in retirement. To achieve this, pension funds must approach their capital adventures with discipline.

This means not getting carried away with ploys to encourage promising young companies to stay in the UK. Instead — given the difficult economic environment — it is crucial to ensure that the businesses pension funds do invest in have a convincing growth trajectory. The government seems to be aware of this. Hunt said the Treasury plans to “improve the understanding of pension trustee’s fiduciary duty”.

A number of market participants told GlobalCapital that they were relieved to see that the Mansion House Compact is a voluntary commitment — some had been concerned that the government could try to force pension funds to allocate money to UK equities.

At the same time, prospective buyers of private equity must be careful not to miss out on opportunities. They need to find good companies and have access to investment vehicles that allow them to buy shares, which is more challenging than simply applying due diligence. The government does not have a plan, just an exppressed intention to explore its options with the help of the British Business Bank.

Hunt’s plans, the pension industry's ratification of the compact and theCapital Markets Industry Taskforce meeting on Friday show that UK institutions are serious about improving the environment for growth companies. But much can still go wrong on the way — they can’t let their attention slip.