20 November 2023

Show me the money – why pensions are key to fixing the UK’s investment drought


Building a technology company takes money. Lots of money. ASML, the world-leading Dutch semiconductor machinery company, took nine years to become profitable. Yet without enormous, years-long investment by the private sector, ASML – and the cutting-edge chips it makes – wouldn’t exist.

But less than half of the UK’s most innovative firms reach their second funding round, compared with 63% of American ones. As my new report with Onward shows, despite having the best venture capital environment in Europe, we still trail the USA by billions of pounds of investment each year, even adjusted for the size of our economy – especially in the later stage.

Where is this missing money? Sat in the UK’s untapped pensions. In the USA, 72% of venture capital funding comes from pensions. In the UK, that figure is just 10%. UK pensions invest four times less in start-ups than big Australian pensions, nine times less than the USA’s, and an astonishing fifteen times less than those in Canada.


These funds also delivered far worse growth for savers than their international counterparts. On average, putting your money in large Canadian, Australian or American pensions would give you 57% faster growth than their UK equivalents. Taking the average saver who has £1,600 put in their pension pot each year, that extra growth is worth almost £98,000 over 35 years of saving.

So why don’t UK pensions invest?

The two key reasons are a lack of consolidation and a poor culture among pension firms.

The first is a legacy of the UK’s fractured pension system. Unusually, the UK has over £100bn in ‘micro’ pensions – tiny schemes with fewer than twelve members, whose small scale means they are unable to develop the expertise required to invest in venture capital. Consolidating these schemes together into larger ‘master trusts’ is essential and will unlock tens of billions of pounds of investment if done correctly.

But even the UK’s biggest funds don’t invest enough in venture capital. Over time, these funds will dominate the UK’s defined contribution pension landscape. Yet regulatory or operational barriers are not to blame. There is a clear consensus across the Law Commission, Investment Association, Treasury, DWP and broader industry working groups that these pensions could invest much more in venture capital if only they were inclined to do so.

Funds are overwhelmingly focused on keeping the handling fees on their assets down, even at the expense of returns for savers. Fees for growth capital tend to be higher than other asset classes, preventing these kinds of investments.

So how do we unlock this enormous pension wealth for the UK’s most exciting, rapidly-growing firms?

First, this week the Chancellor should announce the creation of a Science Superpower Fund at the British Business Bank, which will accept money from small and private pensions, and local government schemes, for placement in promising UK science and technology firms. Using the British Business Bank would mean pension funds wouldn’t need to make investment decisions themselves. They could hand the money to the Bank, and rely on their proven expertise, thus removing the biggest operational barrier to investment.

Second, reforms to regulations could introduce radical transparency and new requirements on pension funds. This would shift their fixation from keeping costs down to keeping returns strong for savers. Changes could also be made to force all large UK pensions to benchmark themselves against international comparisons rather than a historically underperforming UK market. The legal responsibilities of pension trustees would also change so that the interests of savers are more defined and put first.

Third, the government should begin funding the public sector pension system with £3bn per year, with one-fifth allocated to growth capital. Unlike in other countries, where teachers’ and social workers’ pensions are funded by investment growth, the UK’s public sector pensions are, in effect, funded directly from taxation. Growing numbers of civil servant retirees mean that the cost of this scheme will balloon over the coming decade. Government funding for the public sector pension system would ensure that UK public sector workers benefit from high-growth firms, boost funding for those firms, and put the public finances on a stronger footing. If these and other reforms were introduced, it could unlock £20bn of investment each and every year – more than enough to close the UK’s funding gap of £6bn.

This problem has plagued the UK for decades. Without a solution now, the UK risks being left behind in the global science race and will fail to benefit from a new generation of technology companies building, hiring, and researching all over the UK.

The question is whether, at the Autumn Statement on Wednesday, Jeremy Hunt will finally be the Chancellor who fixes it.

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Zachary Spiro is the author of the Onward report ‘Pension Power: Unlocking the UK’s pensions for science and tech growth’

Columns are the author's own opinion and do not necessarily reflect the views of CapX.