On the go: Workplace savers may be missing out on opportunities for better returns if their pension schemes avoid venture capital, a report published on Wednesday has claimed.
Retirement savings for an average 22-year-old could be increased by as much as 7 to 12 per cent if schemes made a small allocation to venture capital and growth equity funds, according to the British Business Bank and consultancy Oliver Wyman.
According to the report, based on long-term historic performance, the asset class has delivered an average return, net of fees, that is 7 percentage points a year higher than public equity markets. Aside from a period of weak performance from 1999 to the early 2000s, venture capital funds have sustained this over the long term.
Simon Clarke, exchequer secretary to the Treasury, said: “Pensions savers across the UK deserve financial security in retirement, and this review is a helpful contribution to that.
“We are keen to support pension funds to invest in the UK’s fastest-growing and most innovative companies, so that savers can benefit from their success while at the same time boosting the economy.”
Trustees have typically shunned venture capital due to the regulatory, commercial and operational environment in which defined contribution schemes operate. The 0.75 per cent cap on charges is sometimes seen as difficult to square with the extra costs involved in managing illiquid and early-stage investments.
However, experts said this was something of a red herring.
Nathan Long, senior analyst at Hargreaves Lansdown, explained: “Schemes are generally priced well below the price cap, so there is plenty of potential to add some more active management if the appetite to do so is there.”
Hugh Nolan, director at Spence & Partners, put it more bluntly: “There is no such thing as a free lunch in investment, and the higher returns anticipated from venture capital reflect higher risks and charges. Many members already struggle with the wide range of investments available.”
He added: “Better member outcomes can be achieved with relatively simple structures that empower members to understand the issues and take control.”
Penny Cogher, partner at Irwin Mitchell, advised caution: “A high amount of due diligence is needed… trustees would want to avoid the risk of claims against them for introducing this category of investment for all schemes members, even all young scheme members.
“DC trustees will be wary of moving into this type of investment in the current climate given the high-profile problems with the Woodford fund and its illiquid, non-traded investments that are difficult to get out of and can be difficult to value,” Ms Cogher added.
