The UK’s pensions funds have agreed on a deal that could see up to £50bn invested into early-stage businesses.
In a speech today at Mansion House in heart of the UK’s financial centre the City London – and a stone’s throw from AltFi’s HQ – Chancellor Jeremy Hunt has set out plans to funnel the UK’s pension savings toward start-ups and scale-ups.
Despite being the largest market for pensions in Europe, long-term UK rules have largely prevented pension funds from investing in privately held businesses to the same extent as other major economies while also mandating allocations to ‘safer’ assets such as government bonds.
However, through Hunt’s new Mansion House reforms, a ‘compact’ has been formed by some of Britain’s biggest pension companies to commit 5 per cent of their investments to private equity and early-stage businesses, unlocking up to £50bn in funding for start-ups and SMEs by 2030.
Hunt said the situation today was “perverse” whereby UK institutional investors are investing a sixth as much into UK startups as similar investors in Australia and Canada.
“We want to be the world’s next Silicon Valley and a science superpower, embracing new technologies like AI in a way that brings together the skills of our financiers, entrepreneurs and scientists to make our country a force for good in the world, while leading the way on AI safety,” said Chancellor of the Exchequer, Jeremy Hunt.
“That means making sure our financial services sector, traditionally so nimble and agile, has the right architecture to provide the best possible security for investors as well as capital for businesses, and the best talent right here in the UK to make that happen,” he added.
The seismic shift in rules goes further trying to boost pension fund returns while at the same time turning on the liquidity taps for high-growth companies, in an increasingly tricky venture capital market.
What are the Mansion House reforms?
The headline announcement is the long anticipated initiative to pump more pension money into high growth companies. But the new measures also include further reforms aimed at improving capital markets and rebooting regulation.
Hunt wants to incentivise innovative companies to think more favourably towards the UK listings regime which has come under scrutiny for not being friendly enough to tech firms.
This includes simplifying prospectuses – the document companies have to produce when raising capital when listing on stock markets, the launch of a new type of stock market – the ‘Intermittent Trading Venue’ – to help private companies access capital markets without floating on a stock exchange, and a move to make share certificates digital rather than written on paper.
“These common-sense changes are grasping our newfound Brexit freedoms to simplify the rulebook – making it easier than ever for firms to research, raise funds, and float their business,” said Chancellor of the Exchequer, Jeremy Hunt.
“This is another step towards delivering the Prime Minister’s priority to grow the economy and sends a clear message to anyone looking to start, scale, and grow their business: look no further than the United Kingdom – the global capital for capital,” he added.
The speech and wider reforms that Hunt promised have gone down well with the UK’s financial services industry.
“Citi strongly supports a UK strategy focussing on growth and improving competitiveness. A government plan to reform the pension system to emphasise net returns would be key to the collective prosperity of all the country’s pensioners, while also creating a higher growth, more productive, and innovative economy,” said David Livingstone, CEO (Europe, Middle East and Africa) of banking giant Citi.
“Based on Citi’s experience working with investors and pension funds around the world, consolidating funds often increases efficiency and improves access to global, diversified investment opportunities, which would be immensely beneficial to the UK, home to the second-largest pool of long-term capital in the world,” he added.
“These reforms will help support economic growth and bolster our capital markets by delivering more investment and making it easier for companies to grow and list here in the UK,” said David Postings, CEO of UK Finance .
Among those signing up for the compact – among the largest incumbent pension funds – is fintech pension provider Smart, which has £3bn assets under management and was founded in 2014.
“Over the last eight years we’ve been able to grow a fantastic, global fintech business from the heart of London by innovating to put UK employers and UK retirement savers first. It’s excellent to see initiatives like this, encouraging the market to create more innovative high-growth UK companies, and in doing so to provide a better retirement for the country’s savers,” said Will Wynne and Andrew Evans, co-founders of Smart.
A long time coming
Investors and others have welcomed the reforms, which build on several years of reviews and consultations as well as the ‘Edinburgh Reforms’ announced at the end of 2022.
“These pension fund reforms are long overdue but serve as a welcome, symbiotic initiative that will both allow UK pensioners to further benefit from one of the country’s best-performing asset classes in venture capital – one in which they have been underweight in and consequently at a returns disadvantage relative to their peers in Australia and Canada – as well as providing additional capital to the already thriving UK tech sector,” said Tim Levene, CEO of Augmentum Fintech,a publicly listed fintech fund.
Pension funds around the world are more familiar with early stage investing, typically than in the UK.
Yoko Spirig, co-founder and CEO of Ledgy, says pension funds will need “a real mindset shift” to meet a recent funding crunch for early stage companies.
“We are in the midst of a funding crunch so early stage companies will welcome any new sources of capital. It’s good that the government is addressing the funding gap in the tech industry where London and the UK is still world-leading.”
“However, it’s worth remembering that for UK companies, managing new pension fund investors may be quite different to traditional venture capital (VC) investor relations. VC investors are used to dealing with early-stage companies where the business model is higher risk.
She points to the Canadian Ontario Teachers’ Pension Plan as one such successful example.
Financial trade bodies also pointed to the reforms’ potential to both help the UK’s reputation abroad and boost pensions funds’ returns.
“We welcome the Government’s efforts to make the UK more competitive and attractive to investors, and it is right that the Chancellor looks to build on the successful role of the City to ensure it remains one of the leading global financial centres while removing unnecessary regulations that have no relevance for UK financial markets,” said Liz Field, CEO of PIMFA.
“As the Chancellor rightly acknowledges, the UK has one of the largest retail investment markets in the world, and it is right that these Mansion House Reforms are focused on ensuring that British people will gain most from greater investment in growing UK businesses in retirement,” she added
