“Innovation creates value”: venture capital welcomes UK pension reform

Last week, the government announced it would redirect £75bn from pension funds to support ‘the tech giants of tomorrow’.

The agreement, known as the Mansion House Compact, has participation from nine UK pension funds – Aviva, Scottish Widows, L&G, Aegon, Phoenix, Nest, Smart Pension, M&G and Mercer. 

The funds have committed to invest at least 5% of their default funds into the UK’s startups and other fast-growing companies by 2030. The providers represent over £400bn in assets.

This alone could unlock up to £50bn of investment in high growth companies. For the Local Government Pension Schemes, a consultation will be launched to set a goal of doubling existing investments in private equity to 10%, which could potentially unlock a further £25bn by 2030. 

Good news for growth

This is huge news for UK startups who have been hit hard by the tech downturn  that has rumbled on since 2022.

“I welcome the Chancellor’s plan for pension funds to invest in high growth tech companies,” Haakon Overli, general partner at VC Dawn Capital, told Startups. 

“For too long, British pension holders have been missing out on impressive returns because their pension funds haven’t invested in the tech giants of tomorrow. It is great to see leading existing venture capital investors like Phoenix and Legal & General Group Plc participating in the scheme.

“Pension funds in other countries have been significant investors in venture capital funds for decades to the benefit of millions of retired workers, while the UK has lagged behind in its approach. 

“And it is not only British pensioners who have lost out – not investing even a fraction of the trillions managed by UK pension funds into the startup sector has penalised the UK economy. The evidence shows that innovation creates value: when a country’s tech sector thrives, its entire economy benefits.”

Pension innovation

Overli notes that in order to avoid distortions in the market, pension fund assets should only be allocated by experts to top performing managers through processes governed by rules that ensure investments deliver for both pensioners and the wider UK economy.

“Britain has been at the forefront of innovation for centuries, but it has to keep that momentum going and the reforms offer a clear opportunity,” adds Overli. 

“They will not only allow innovative UK startups to access the capital they need to grow into global companies, but will provide a much-needed boost to our stagnant economy and help to deliver the well-paid, skilled job opportunities pensioners’ children and grandchildren will need.”

The UK has the largest pension market in Europe, with a worth of over £2.5tn. Over the past ten years, automatic enrolment has helped an extra ten million people save for their futures, with £115bn saved in 2021 alone.

To ensure the funding created by these reforms is invested quickly and effectively, the Chancellor has asked the British Business Bank to explore the case for the government to play a greater role in establishing investment vehicles.

Read more about how SMEs are reacting to the pension fund reforms.

Kirstie Pickering - business journalist

Kirstie is a freelance journalist writing in the tech, startup and business spaces for publications including Sifted, TNW, UKTN, The Business Magazine and Maddyness UK. She also works closely with agencies such as CEW Communications to develop content for their startup and scaleup clients.