Experts in private capital and pension funds have issued new recommendations on how to facilitate more UK defined contribution (DC) pension fund investments into private capital.
Among the recommendations made by the pensions and private capital expert panel is a call for the Financial Conduct Authority to carry out a formal post-implementation review of the long-term asset fund (LTAF) framework, once a greater number of LTAFs have come to market.
LTAFs aim to encourage pension funds and individual investors to put money into long-term, illiquid assets more easily. Several asset managers have launched private credit LTAFs, including Aegon Asset Management and M&G Investments.
The panel has also urged regulators to ensure that DC schemes have clear expectations around liquidity as the landscape evolves, and called for the FCA to amend the ‘permitted links’ rules as soon as possible to widen private capital investment options for DC default schemes that use life insurance platforms.
These rules define which assets insurance companies can invest DC funds into, such as property, listed securities and LTAFs, but some industry stakeholders have argued that the ‘permitted links’ are not wide enough to encourage investment into private capital.
The panel has also called for the UK government to support a new programme that will increase opportunities for investing in venture and growth capital funds, consisting of a private capital fund directory; an investment marketplace for private capital funds specially accredited for DC schemes; and a fund of funds investment vehicle, which will enable access to returns generated by smaller private capital funds.
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In a report on pensions and private capital which was released by the panel, the UK government was urged to endorse the programme and help to develop new partnerships to encourage DC pensions to invest in private capital.
The panel was created in February 2024 by the British Private Equity & Venture Capital Association, in partnership with the ABI and PLSA, and includes well-known figures from across the pensions industry including Phoenix Group, M&G and NEST. They believe that implementing a new government-supported programme would further enhance the recent progress made by venture capital firms and UK pension investors to develop a long-term and constructive working relationship with each other.
“It has been very encouraging to see increasing pension funds making private capital commitments over the last year,” said Kerry Baldwin, chair of the pensions and private capital expert panel.
“Work by the expert panel has brought both the pensions and private capital sectors together for the first time to provide solutions for regulators, government and industry.
“The expert panel’s recommendations will enable greater investment for venture and growth funds, and for founders to continue to establish and grow their business in the UK.
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“Government has an opportunity to build on this growing momentum with a new programme informed by what both pensions and private capital leaders believe will make a difference.
“In addition, creating a ‘shop window’ for pension funds to better evaluate individual private capital firms will accelerate and prompt new conversations with Mansion House signatories that will ultimately drive increased investment in ambitious businesses, and result in greater returns for pension savers.”
Pension funds have increasingly been allocating to private markets in recent years, to diversify away from public equities while benefitting from stable, fixed returns.
Last July, Phoenix Group entered into a private markets joint venture with Schroders called Future Growth Capital, with the aim of deploying £10-20bn of investor funds into private markets over the next decade.
“Phoenix is delighted to have contributed to the pensions and private capital report over the last 18 months,” said James Mitchell, head of strategic partnerships, Phoenix Group.
“By pooling cross-industry knowledge into this forum, we are crowding in further capital to private market investments in the UK.
“Through Future Growth Capital, our joint venture investment management business, Phoenix aims to allocate £2.5bn over the next three years to a diversified private markets strategy.
“Our partnership with Future Growth Capital puts us at the forefront to deliver better outcomes for our DC customers.”
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