The chancellor's announcement that defined contribution (DC) fund money will be used to invest in British start-ups has been branded too risky for the average pension saver.
Kay Ingram, director of public policy at national advice firm LEBC said the proposal, announced in yesterday's Budget (29 October) under the patient capital initiative, would only suit savers with surplus assets who don't need to access their funds.
She said: "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."
HM Treasury had presented a document alongside the Budget which explores options for pooled investments in patient capital by DC schemes.
With total assets under management expected to exceed £1trn by 2025, DC pension schemes "have a vital role to play in long-term financing for UK growth and innovation," the government stated.
If the initiative is adopted on a significant scale, it will provide additional funding for faster-growing start-up companies while also potentially increasing returns for savers.
But Ms Ingram said 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, which will increase to £1,055,000 from next April.
She said: "They are more likely to have the capacity to bear the risk of loss. If they were offered forgiveness of the 55 per cent 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."
Steven Cameron, pensions director at Aegon, said the government’s initiative made sense as pension schemes often had longer investment horizons, with some members remaining invested for decades, which meant "an element of riskier patient capital investment may be worth considering".
However, he said as individuals changed jobs and transferred their pensions, schemes needed to ensure they also had sufficient liquidity.
He said: "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.
"While an element of capital investment may be worth considering in some schemes, we’re pleased to see the government recognise this must be part of a diversified approach.
"It must be left to trustees and scheme providers to consider, with no mandatory requirement."
Yesterday it was also announced that the Department for Work and Pensions (DWP) will launch a consultation in 2019 on the function of the pensions charge cap, to ensure that it does not unduly restrict the use of performance fees within default pension schemes, while maintaining member protections.
Since 2015, providers have had to cap the charges within default funds to 0.75 per cent of funds under management per year.
Last November, the minister of pensions and financial inclusion, Guy Opperman, had said the cap was working broadly as intended and had helped drive down costs for members.
According to Tom Selby, senior analyst at AJ Bell, the consultation could spell a future increase to the cap as schemes look to invest in riskier companies.
He said: "While details are thin on the ground at this stage, it may be that the chancellor feels the existing charge cap potentially blocks schemes off from investing in the riskier next generation companies he expects to drive growth in the future."
However, Mr Selby noted that any shifting of the charge cap "will need to ensure it doesn’t reduce value-for-money for automatic enrolment scheme members".
He added: "Ultimately the aim of auto-enrolment default funds schemes is to maximise returns for retirement investors over the long-term rather than back particular sectors or businesses.
"If the charge cap were increased for certain types of investments, the trustees of that scheme would have to be confident the extra price paid by members was still money well spent."
maria.espadinha@ft.com
