The government rightly wants to ensure UK companies, including newer, innovative companies, have access to the capital they need to fulfil their growth potential.
There is always a suspicion that HM Treasury views pensions, with their tax breaks, as a short-term cost rather than as a long-term benefit – "eye-wateringly expensive" anyone?
So, in some ways, it is refreshing to see government recognition that pensions are a good thing, offering a major source of investment for the UK economy.
Within this, it clearly has its eye on the £1tn defined contribution pensions market as a source of long-term ‘patient’ capital investment.
Patient capital investment offers the potential for high returns for those prepared to take a risk with newer, innovating companies and who are prepared to invest for the longer term.
Pension schemes often have longer investment horizons with some members remaining invested for decades, which means a modest element of riskier patient capital investment may be worth considering.
This is one reason why such investments are likely to be considered only by the largest scale pension schemes who utilise investment management consultants.But unlike defined benefit schemes, within DC schemes it is the member that bears investment risk, as well as benefiting from potentially improved returns.
As a result of auto-enrolment, almost 10m additional individuals are now in a DC scheme, with the vast majority making no investment decision and remaining in the default fund chosen by the trustees or scheme provider.
This places considerable responsibility on those selecting the default to ensure it is truly appropriate for members, reflecting the risk/reward profile of the ‘default’ member.
The Pensions Regulator recently offered new guidance to trustees considering such investment. This stressed the need for trustees to complete sufficient due diligence and to make sure they understood both risks and drivers for returns.
This is likely to require the services of a specialist in start-up, innovator companies. This is one reason why such investments are likely to be considered only by the largest scale pension schemes who utilise investment management consultants.
The regulator also rightly emphasises liquidity considerations and it may be that the investigation into a pooled form of capital investment may help here.
Scheme objectives and membership profile are also important considerations, so we are pleased to see the government recognises this must be left to the trustees’ and scheme providers’ discretion and always as part of a diversified approach.
While many DC schemes have positive cash flows, 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.
One surprising inclusion in the Budget papers was the announcement that the Department for Work and Pensions will consult on how performance fees – often used in patient capital investments – ‘fit’ with the 75 basis point charge cap, which applies to default funds.
At present, there is no leeway to break the cap if fees rise in reflection of good performance.
I await more detail with interest, but new complex exemptions to the charge cap to allow greater investment in patient capital would, in my view, look like the investment tail wagging the pensions dog.
At the end of the day, the key aim of pension schemes must remain providing an income in retirement to their members, not to be a convenient flow of investments to finance innovative companies within our economy.
Steven Cameron is pensions director at Aegon
