A combination of thunderstorms and a fascinating day of televised sport kept me attached to my keyboard for most of yesterday, allowing me to converse with readers of my blogs. Thanks for the comments, it is good to know when you’re wrong and sometimes good to get into a polite scrap. I got into one with a lawyer friend over plans to invest pensions in early stage tech and science companies via LIFT and Nicholas Lyons proposed UK growth superfund.
Henry Tapper fair enough. But I still think true entrepreneurial start ups have no place in pensions unless a member chooses that level of risk
It may surprise readers, but their pension may already be funding such start-ups , providing funds that accompany SEIS , EIS and VCT investments made by wealthy savers. The Foresight Group have been offering LGPS funds through their pools, access to such investments for some time and Funds such as Clwyd ust such access to “level up” and improve overall returns on the fund.
The issue is whether such funds are suitable for large workplace DC pension funds and their “investors”, funds such as the defaults of Nest, People’s Partnership and Smart pensions.
The conversation arose out of an article on BP’s proposed buy-out of its liabilities, swapping its £30bn fund for an insurance policy to pay annuities.
My position is that the deployment of that £30bn can be more meaningful outside an insurance company’s internal funds than in. I am not suggesting that BP invest heavily into start-ups or scale-ups , but nor do I think that such large amounts of money are lost as “productive capital”.
BP was a start up once.
The Anglo-Persian Oil Company (APOC) was a British company founded in 1909 following the discovery of a large oil field in Masjed Soleiman, Persia (Iran). The British government purchased 51% of the company in 1914, gaining a controlling number of shares, effectively nationalizing the company. It was the first company to extract petroleum from Iran.
The story of the D’Arcy Oil Concession and how it became BP, can be read here.
Darcy “exited” by selling his business to the British Government, who knows what might exit via finance from investments through Foresight or similar organisations.
On the 29th June, Frontier were purchased by Thompson Reuters. New companies will come into the market to take Frontier’s Place and the process of growth and renewal will begin again
Pension schemes are missing enormous opportunities by not participating in early stage growth. Denying them access to the entrepreneurial growth phase is as pernicious to savers as it is to the entrepreneurs who need pension fund’s money.
Start ups need to scale up
Traditionally , start ups scale up through boot-strapping, the process where they sell things and grow the balance sheet through good products. Some small companies however, can accelerate growth through outward investment from private equity or through listing in the junior section of a stock exchange (this is the route Pension Bee has taken).
The process of finding such companies and doing due diligence on them is slow and arduous. It is hard to get scale. Organisations such as Innovate UK channel tax-payers money into start ups but the sums involved barely touch the edges of demand.
What is needed is the architecture that allows small ambitious companies to grow at the speed they need to compete with similar companies in other parts of the world. This is what Nicholas Lyons, the City of London mayor is proposing be set up – and he is pointing his fund directly at the kind of funds that my correspondent thinks he shouldn’t.
Does venture capital have a place in our retirement pots?
Like salt, the private capital invested in start ups (venture capital) is tasty but not to be taken in large quantities. The £50bn fund Nicholas Lyons is expecting to raise can go a long way in spicing up our economy as each sprinkling can turn a dull dish into a memorable one.
Lyons has got the support of the executive of his company (Phoenix) and of several of his UK peers, all of which run workplace pensions either as GPPs or master trusts (typically both).
The idea is that up to 5% (half a tithe if you think Roman!) of a workplace pension default is deployed into such a fund , invigorating the economy and spicing up the investment returns savers get – improving the value of their money.
Those who argue against this “risk-taking” , do so with reason. Many – indeed most – of the investments made at early stage – fail. But some, such as the Anglo Persian Oil Company become the listed companies of tomorrow. Meta and Microsoft were start ups not so long ago.
Should a member have to choose to take such risk?
Many of my friends feel that savers should not have to take risk with their retirement funds, one believes that pensions should be purchased from the Government using deferred payment gilts that could be bought over a post office counter. Another believes we should revert to an unfunded system (SERPS or S2P). Millions of people are investigating buying extra state pension and many are actually topping up their pension entitlements through payments to DWP. Savers do not have to take risk with their money to get extra pension.
But in 2008, we enacted legislation that effectively swapped the unfunded second state pension for a funded alternative – the workplace pension, a pension whose money was assumed would purchase an annuity.
We have moved on and the money saved into workplace pensions can now remain invested or withdrawn under pension freedoms.
Extraordinary risks are taken with savers money such that in 2022 nearly a fifth of all DC funds were lost as listed equities and corporate and Government bonds fell in value. We consider these risks acceptable to take with the vast majority of saver’s funds.
In the light of this, I find it odd that we consider the investment of no more than a twentieth of our savings in risky ventures, to be an unacceptable risk.
If LGPS finds the rewards from investing in venture capital acceptable relative to risks taken, why should not Nest and other workplace pensions. After all, many of the people who save into workplace pensions owe their livelihoods to the entrepreneurs who started their employers!