Investing in UK fast-growth industries should become easier for the country’s defined contribution (DC) schemes, through plans contained in last week’s Budget.
The government intends to boost investment in high growth sectors such as digital, life sciences and advanced manufacturing, so they can start, scale up and remain in the UK.
It plans to achieve this by promoting the creation of new vehicles for investment into science and technology companies, tailored to the needs of DC pension schemes.
The government is now inviting feedback on the design of this Long-term Investment for Technology and Science (LIFTS) initiative, with a package of measures expected in the autumn.
Callum Stewart, head of DC investment at Hymans Robertson, said the policy in principle would benefit DC funds, given a need to adopt a less constrained approach to truly unlock the potential for improved member outcomes.
He added: “Requirements such as climate governance and reporting, which impact UK pension funds, are likely to increase focus on investing in companies driving our transition towards a lower carbon economy.”
Stewart considers that the programme will provide diversity relative to investing in established companies, and expects most portfolios to target not just competitive UK companies, but also the wider global opportunity set.
And he said: “Though the lack of a long track record and reported information could be a barrier for general investors, active fund managers can add value as they will consider potential inclusion of companies in investment portfolios after carrying out extensive research.”
John Godfrey, director of corporate affairs and levelling up at Legal & General, welcomed the decision to launch the LIFT consultation, saying it should drive some interesting new approaches to attracting more venture capital (VC) and equity investment into emergent companies.
But he added that it needs to be part of a broader initiative to re-equitise the UK economy. “Pension funds used to be roughly 50% invested in equities – now equities account for less than 5%,” he observed. “We need regulation, accounting and policy changes to facilitate ‘VC into DC’ and to get Britain to invest in its own growth economy, in high productivity, high-pay jobs.”
Stephen Budge, partner in LCP’s DC team, said any investment case for investing in high growth start-ups across the science and tech sectors came with challenges.
He continued: “Private markets remains a very new area for DC investment strategy design and the approach tends to focus on appointing a manager to access a broad spectrum of private market investments. This helps diversify the liquidity risks, valuation points and reduces timing risks and means trustees do not need to assess the merits of each underlying allocation.”
So he said for specific investment in a niche sector, it would be down to the appointed fund managers to consider the merit of UK-focused science and tech opportunities.
“As such, it raises a question as to how much commitment these investments will see from the UK DC market until private markets gain traction among schemes,” Budge concluded.