Is the potential inclusion of ‘patient capital’ investments inside pensions too risky for the average saver? We round up thoughts from various experts.
Proposed plans to allow pension funds to invest in so-called “patient capital” have been greeted with caution.
As part of Monday's Autumn Budget, more details in regard to the government’s Patient Capital Review were unveiled. The primary aim is to encourage more money to be invested in small UK firms, in order to support long-term growth and innovation.
One route the government has been exploring is how to reduce the barriers to pension fund investment in patient capital, on which further details were published.
It was announced that through the British Business Bank, the government will support pension funds to invest in growing UK businesses. It added that several of the largest defined contribution pension providers in the UK have committed to work with the British Business Bank to explore options for pooled investment in patient capital, including Aviva, HSBC, L&G, NEST, The People’s Pension and Tesco Pension Fund.
Other details at this stage are thin on the ground, but next year a discussion paper will be published by the Financial Conduct Authority (FCA) that will look at how UK’s existing fund regime enables investment in patient capital. The FCA will also consult next year on updating rules to allow unit-linked pension funds to invest in an appropriate range of patient capital assets.
In addition, a new form of the Enterprise Investment Scheme (EIS) fund has also been mooted. If given the green light it will invest in entrepreneurial companies that are defined as knowledge-intensive companies.
Pension funds to invest in ‘patient capital’
Thus, the general direction of travel seems to be that in the future pension funds will have greater freedom to invest in entrepreneurial British businesses.
On the one hand, given the long-term nature of pension investing, allocating capital to small companies with aspirations to grow into large world-leading businesses could be viewed as a good fit.
This point is acknowledged by Ed Monk, associate director for Personal Investing at Fidelity International. He adds: “For investors, many of the greatest investment growth stories these days take place not in the listed space but within small start-ups supported by private equity. Tapping into that growth is bound to be attractive to many.”
But the trade-off that comes with backing young businesses is that by their very nature they are high-risk investments. Therefore, the chances are that those pension funds which do allocate money to investments falling under the patient investment moniker will do so on a small scale.
Monk adds: “These investments are by their nature highly uncertain, and their illiquidity - lacking a ready-made market of buyers ready to buys shares if you want to sell out - adds a degree of risk. Such high-risk investments are unlikely to take up more than a small chunk of savers’ portfolios.”
Kay Ingram, director of Public Policy at LEBC, the retirement adviser, also expresses concerns. She warns that patient capital investment is unlikely to pose a suitable level of risk for the average pension saver.
“While encouraging start-up capital investment is a worthy aim of the government, it is unlikely to be a suitable investment risk, except for the wealthiest savers.
“The higher returns possible from this type of investment come with higher risk of losses and are usually only considered suitable for those with surplus assets and capacity to wait for the investment to deliver, without needing access to their funds.”
She adds that a more suitable proposal would be to offer these higher-risk investment opportunities to wealthier savers, who have funds in excess of the lifetime allowance for pension savings (£1,055,000 from next April).
“They are more likely to have the capacity to bear the risk of loss. If they were offered forgiveness of the 55% tax charge on funds in excess of the Lifetime Allowance in return for investing in patient capital, we believe many of them would take this up,” adds Ingram.