Rishi Sunak’s bid to increase investment into UK infrastructure and tech companies by shifting workers’ pension pots into higher-fee private equity funds risks benefiting financiers rather than savers or the wider economy, investors have warned.
The chancellor is seeking to relax rules that stop workers auto-enrolled into workplace pensions from having their savings funnelled into expensive venture capital and buyout funds.
These funds hold many of the assets targeted by Sunak but they typically charge more than the 0.75 per cent cap on annual management fees put in place in 2016 to protect savings from being eroded by high charges.
Ministers argue diluting the cap would help towards the government’s goal of “levelling up” the UK economy, by freeing up more money to be invested in longer-term infrastructure assets, such as renewable energy projects, and innovative tech firms.
But several private equity executives who stand to benefit from the scheme said its value to the wider economy could be limited. “There is a lot of capital out there already,” said the head of one investment group’s European infrastructure business.
“When you look at renewables, everyone wants a share, so there’s no shortage of demand for those assets,” he added, suggesting that the impact on the UK economy of channelling cash from workplace pension funds into private markets could be “marginal”. Globally, the private equity industry has amassed as much as $3tn in funds that it has not yet invested.
The government is due to consult on the plans and will “seek a balance” that would encourage investment in illiquid assets without completely removing a cap on fees, according to people briefed on the plans. It is not clear whether or how the government would ensure that any extra funds raised were directed towards UK investments.
At large private equity groups, executives’ “eyes would light up” at the prospect of “a new pocket of capital that these private market firms can target,” if the cap was significantly raised, a person who raises funds for private equity firms said.
Management fees of around 2 per cent can be a lucrative source of revenue for buyout groups, in addition to the carried interest mechanism, that typically pays out a 20 per cent share of profits after an initial target is reached to managers of PE funds.
But “there’s a difference between the goal of Rishi and the goal of the [private equity groups],” the person added. “Rishi’s goal is to get them to invest in UK infrastructure, and the fund managers’ goal is to deliver good returns. Does UK infrastructure provide the best risk-adjusted returns at the moment? That’s debatable.”
Ted Frith, chief operating officer at GLIL Infrastructure, a £2.5bn fund backed by investors including local government pension funds, said he was “surprised to see [Sunak] trying to change the fee cap.
“It feels at the moment that there’s no shortage of cash, but there’s a shortage of ways to get money into projects that can achieve my investment objectives,” he said. The group promotes itself as a low-fee alternative to private equity.
Some of the UK’s largest pension funds have previously rejected paying performance fees, including Nest, the £16bn government-backed workplace pension manager, and Scottish Widows, one of the UK’s largest pension providers.
Other pension funds are keen to have the freedom to invest in more expensive, illiquid funds, however. “Such investments have the potential to boost savers’ returns as well as support UK growth,” Aviva said, adding that fees should be carefully balanced against returns.
UK defined contribution pension schemes have about £500bn in assets, according to a report published last month by the Productive Finance Working Group.
Most UK workers’ pension schemes use a defined contribution model, meaning the value of the pot is based on how much is paid in, plus investment returns.
Local councils’ pension funds operate on a defined benefit model, meaning they are not covered by this rule, and many have ploughed large sums into private equity funds despite the high fees.