Venture capital investment could buoy UK DC plans by 12%

02 October 2019

A new member of a defined contribution scheme in the UK could enjoy as much as a 12% boost to their retirement savings, should their scheme up its investment allocation in alternative investments, a new report has found. Increasing the backing defined contributions give to venture capital and growth equity could also buoy the savings of older employees by as much as 10%.

Defined contribution pension scheme savers are missing out on higher returns due to a lack of investment in venture capital and growth equity funds, research from consulting firm Oliver Wyman has found. Such schemes’ lack of investment in these areas means that savers are missing out on opportunities for better returns; however, this can be overcome with improvement in being able to access these alternative asset classes.

A defined benefit (DB) pension plan is a type of pension plan in which an employer/sponsor promises a specified pension payment, lump-sum or combination thereof on retirement that is predetermined by a formula based on the employee's earnings history, tenure of service and age, rather than depending directly on individual investment returns. A defined contribution (DC) scheme is an occupational pension plan in which employees make their own contributions alongside their employer, both of which are invested and the proceeds used to buy a pension and/or other benefits at retirement.

Venture capital investment could buoy UK DC plans by 12%

According to Oliver Wyman’s research, the assets under management in workplace DC schemes could grow to more than £1 trillion by 2029. However, according to the analysts, the potential of this huge injection of capital in DC schemes could be wasted, as DC schemes are passing up a major opportunity in comparison to DB schemes, which have a higher propensity for investing in alternative schemes. Almost a quarter of UK DB scheme allocations went towards venture capital and growth equity, compared to just 13% of the more risk-averse UK DC schemes.

Instead, DC schemes prefer to invest in listed securities, with a quarter of their allocation going toward domestic equity, and 45% heading non-domestic equity. This presents a challenge for DC schemes, because the number of listed assets continues to fall globally, something particularly evident in the UK and the US, as the number of listed companies has declined by 26% since 2005 and by 50% since 1996. In contrast to listed equities, private markets have been growing rapidly and are expected to continue to do so, with companies now looking to remain private for longer, prior to listing, helping to drive this.

Venture capital investment could buoy UK DC plans by 12%

Aside from the fact this means it will be increasingly difficult for DC schemes to prioritise listed equity at such a rate in the future, failing to adapt to this new trend now could also be squandering a key growth opportunity. According to Oliver Wyman, retirement incomes could see significant increases if DC schemes increased their venture capital or growth equity allocations.

Analysis from the consultancy suggests that if a 22-year old were to enter a default strategy now, if that DC would back a higher rate of alternative investments, the employee could achieve an estimated 7-12% increase in their total retirement savings at the end of their working life. The news is not just important for young workers, either, and even those much further through their careers could benefit significantly from the potential increase in returns. A 35-year old with £25,000 currently invested in retirement savings, for example, could enjoy a 6-10% increase in their lifetime retirement savings.

Venture capital investment could buoy UK DC plans by 12%

Previously, DC schemes have had a low investment allocation in venture capital and growth equity funds due to the regulatory, commercial and operational environment in which they operate. Despite this, Oliver Wyman believes that its report shows this does not have to be the case.

Oliver Wyman Partner John Whitworth said of the findings, “Our in-depth analysis shows for the first time that those saving for retirement – particularly young adults – could see a big increase in their pension pots if more money is invested in the companies of tomorrow. As venture capital funds represent those companies currently transforming our society and shaping our future, it stands to reason that as they innovate and grow, so should the return on investment for pension savers.”


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