Four ways to unlock pension fund investment in VC

In the UK and Ireland, just 0.007% of pension fund assets under management are invested into VC — lower than the European average, and a world away from North America, where 15% of pension fund assets are allocated to private equity, including VC.

It’s a statistic which UK startups, VCs, pension funds and the government all want to see increase. And with pension funds under pressure to make savings products work harder — only 3% of millennials saving into a defined contribution (DC) today can expect a ‘moderate’ retirement, according to the Pensions and Lifetime Savings Association — why hasn’t it happened yet?

“There are several barriers to driving domestic pension investment into UK venture capital,” says Michael Moore, CEO of British Private Equity & Venture Capital Association (BVCA). “These include the historically risk averse nature of many UK pension funds and their focus on short term costs over long-term value, combined with regulatory constraints like the charge cap.”    

However, some progress is being made. For example, the Mansion House Compact, launched in 2023, aims to increase pension fund exposure to unlisted equities to 5% by 2030 and the British Business Bank’s British Growth Partnership hopes to encourage more investments in tech and science. The Pensions and Private Capital Expert Panel, a panel of experts in pensions, VC and growth equity, have also been working over the past year to address some of the barriers holding back greater investment in VC.  

Most recently, in November last year, Chancellor Rachel Reeves announced pension “megafunds”, where smaller pension schemes could be consolidated into larger funds, unlocking £80bn for high-growth investing in the process. If successful, it could bring the UK closer to the funding landscapes seen in Canada and Australia, where such schemes — and higher levels of VC investment — are already the norm. Still, turning policy into reality takes more than government announcements. 

“While recent reforms, such as those announced in Rachel Reeves’ Mansion House speech are encouraging, it will take time to fully address the structural and cultural challenges that have limited pension allocations to VC,” says Moore.  

Here’s four ways VCs and pension funds could work together. 

1/ Create more options for pension funds to invest in VC

“[This is] a topic that’s been on my agenda every day for the last couple of years,” says Ben Luckett, a managing director at insurance company Aviva who leads on venture investing strategy and set up the firm’s corporate venture capital fund in 2015.

In January, Aviva launched a long-term asset fund focusing on venture and growth, giving DC schemes a new product to invest in. Luckett says such products need to be “priced appropriately” to succeed, balancing the need for diversification with risk appetite and savers’ returns.

Other structures could also be leveraged. Luckett suggests co-investment and follow-on investing opportunities would help bridge the UK’s scaleup capital gap, leveraging pension funds’ long-term horizons while ensuring value stays in the UK. 

In September, VC fund Future Planet Capital launched a co-investment fund aimed at pension schemes — aiming to funnel £1bn of pension investments into UK startups.

2/ VCs should spend more time educating pension fund LPs on their risk profile…

The startup press is full of stories about meteoric rises and devastating falls. 

“This creates a perception that, as an asset class, it’s high risk,” says Camilla Richards, head of investor relations at London-headquartered VC firm Atomico. “But when you invest in a fund with a diversified portfolio, that helps to create a much lower risk profile.” 

Richards says VCs should spend more time educating — both directly with pension fund LPs, but also as part of broader communications initiatives — on the numbers that support VC investment. According to the BVCA, its members have generated returns of 17.8% per annum since 2014, equivalent to investors getting a 1.82x return on capital invested over the past decade. 

3/ …while pension funds should make themselves accessible so VCs can understand their concerns

While pension funds may view VC as risky, VCs may not fully appreciate the constraints pension funds face, as they manage money for everyday savers who are relying on their portfolios for retirement.

“Pension funds acknowledge the risk return that can be gained from adding venture to a diversified portfolio if it has the right vehicle, governance and fund structure to meet their underlying member’s needs as they approach retirement,” says Kerry Baldwin, managing partner of IQ Capital, a deeptech early-stage VC firm based in London and Cambridge.  ? 

Richards says VCs can struggle to understand this because it can sometimes be hard to get in the room with pension funds: “It’s difficult to get access, and until you have that dialogue it can be difficult to understand the challenges.” 

France’s Tibi scheme, which promotes collaboration between institutional investors and VC firms goes some way to answer this. By partnering with fund managers or consultants, pension funds can improve their ability to assess VC investment opportunities. 

“The UK should take inspiration from France’s Tibi scheme, which has successfully mobilised institutional capital for high-growth businesses through strong government leadership,” says Moore.?“A UK version, with senior government backing, could help direct more pension investment into venture capital, supporting the country’s tech ecosystem and closing the scaleup funding gap.”

Baldwin also points towards Australia.

“Australia stands out as an invaluable case study for the UK DC market,” she says. “Australian schemes, which operate in a similar landscape to the UK, have a record of investing in global private capital fund models.”  

4/ Shift the focus from upfront costs to value for money

A culture shift is also needed. The Pensions Regulator, FCA and DWP are currently working on a “value for money” framework to help pension schemes better assess how they are providing value for savers, empowering them to invest in asset classes which might have higher upfront costs than, say, the stock markets, but which can also generate bigger returns. 

“We’ve seen a DC market that’s grown up with a focus on cost, and venture capital can be at the more expensive end of the asset class mix,” says Luckett. “Making sure pension decision makers look at it from [a value-for-money] lens is important.”

“Increasing DC pension investment in fast-growing businesses could be a game changer for the UK economy by providing more capital for our most innovative sectors, while giving pension savers access to more diversified portfolios and the strong returns private capital can deliver,” concludes Moore. “Continued collaboration between pension funds, regulators and the VC industry is essential.”