EIS and VCT investors would benefit from improved liquidity if the government moves forward with plans to encourage pension savers to invest in later-stage venture capital schemes, but pension savers who are accustomed to daily dealing funds could face the opposite problem.
The Treasury is set to unveil a feasibility study into using defined contribution (DC) schemes to fund UK companies with high-growth potential in Monday’s Budget, according to Sky News reports. Aviva, Legal & General, Nest and The People’s Pension are among the industry representatives that would reportedly be included on the new working group.
However, pension experts warn a mandatory scheme would push investors up the risk scale.
EIS and VCT liquidity
The EIS Association has long been recommending opening up early stage investing to pension schemes and investors would directly benefit if the Treasury moves forward with the changes, says chief executive Mark Brownridge.
The trade organisation represents SEIS and EIS investors, who are involved in the earliest stage of investment. VCT is the next stage in the fundraising cycle, while the government proposals would open up pensions savings to the next stage in funding.
Broadbridge says: “The difficulty for some companies is trying to get that follow on funding. That means the EIS funding stays in for longer than it might need to. If there’s a DC pension scheme coming in at that stage you could offer the company money, but it also offers an exit route for those EIS investors.”
Currently, UK pension savers have most of their exposure to UK companies in the FTSE 100 and FTSE 250, he said.
Liquidity problem shifts on to savers
However, the proposals could cause liquidity problems for DC pension savers.
Aegon pensions director Steven Cameron says: “People do change jobs and transfer their pensions, meaning schemes need to ensure they also have sufficient liquidity. Patient capital investments may not be priced daily which creates a challenge for schemes in which members can buy and sell units in investment funds daily.”
DC pension schemes can only offer daily dealing funds.
For this reason, closed-ended funds should be considered, says Association of Investment Companies (AIC) chief executive Ian Sayers. “Their time horizon matches that of pension funds, with investment managers being able to take a long-term view.”
Post-Brexit boost should not come at expense of savers
“Post Brexit we do need a way in this country of continuing to support entrepreneurship and small growing businesses,” said Chelsea Financial Services managing director Darius McDermott. Using money stuck in pension schemes seems like a good way to do that but the devil is in the detail, McDermott said.
But, he was wary of any scheme that would make patient capital investments a requirement of DC pension savers.
“It’s a nice idea for long-term capital to support the economy, but forcing people up the risk scale without their choice is something else. If there’s an incentive for individuals to take that greater risk, then it’s up to the individual if they want to do that.”
He said the government could put in 30p as a tax incentive for every pound invested, as per the VCT rules. “But it certainly isn’t for everybody.”
Quilter pensions expert Ian Browne questioned whether the patient capital investments would be limited to accumulation assets given the risk attached to them. Browne also questioned how potential higher costs associated with start-up investing would mesh with value for money.
However, he welcomed the fact the Treasury is initially looking at feasibility via a study and said it’s sensible to explore how pensions could be more diversified while also boosting the economy.
