The government has suggested the pensions industry leads the way in helping defined contribution funds overcome barriers to investing in young innovative firms.

The Treasury’s Financing growth in innovative firms consultation asks how barriers can be removed to help pension schemes invest more in patient capital. The paper highlighted that a lack of appropriate capital appears to be an important factor that limits the development of younger firms.

The government said long-term capital is particularly important for younger firms that invest heavily in research and development. It believes increasing long-term investments into these companies will help to maximise the economic impact of the government’s new investment in R&D announced at Autumn Statement 2016.

The consultation identified defined contribution and defined benefit pension schemes as two large pools of potential investment, but identified several barriers. For example, within DC schemes it noted that trustees and providers are limited in their ease of allocating a portion of their assets to patient capital or other form of illiquid assets.

This is because market practice for the institutional investment platforms used by most schemes generally dictates that all their investments should be priced daily and tradable daily. This practice is usual despite many DC savers being several decades from drawing on their pension or changing their pension allocation as they approach retirement.

In terms of DB investments, it noted there are no regulatory barriers that prevent investment into patient capital. As a result, the government is interested in knowing more about the appetite of UK pension funds to invest in UK patient capital and to explore whether there are significant barriers holding back greater investment.

It did note the fragmentation of UK DB pension schemes, but highlighted that the Department for Work and Pension’s green paper on DB schemes looked into pooling DB pension funds.
However, it said that as both DC and DB pensions are ultimately pooled, both with other members of the scheme, and for DC investors with other investors in the underlying pooled funds in which their contributions are invested.

“As long as those pools are large enough, the investments are available in a way that pension schemes can hold, and trustees and providers believe they are in members’ best interests, there should be no barriers to pension schemes allocating a proportion of their investment to patient capital,” it said.

As a result, for DC investments it said the best approach to removing these barriers would therefore be industry-led. “This consultation therefore seeks views about the steps needed to support investment by DC pension investors in less liquid asset classes such as patient capital,” it said.

The consultation closes on 22 September 2017 and can be viewed here.

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