Soaring national deficits and the dawning of the ‘Age of Austerity’ in Western economies has taken the headline writers’ attention away from the impending longer-term pension crisis. But with FTSE100 companies’ pension deficits arguably in £90 billion (€109 billion; $135 billion) plus territory and an unfunded public sector pension bill of some £2 trillion, it’s a problem that is not going away.
And what are those responsible for directing UK pension assets doing to address the problem? Too little, it seems. Mainstream equities, fixed income securities and cash seem to still be the staple diet of the typical UK pension scheme. In addition, governments generally appear to be hell bent on diminishing incentives for individual pension investment, rather than encouraging savings and self-responsibility.
But what’s wrong with pensions investing in established equities? Long-term historic figures appear to show they outperform cash, beat bonds and provide a hedge against inflation. The answer of course is nothing; mainstream equities will always be a cornerstone of pension investment. The problem is that the investments in equities by pension funds tend to be backward looking; by the time companies reach their large cap FTSE 100 status, their ‘super-growth’ phase is behind them. Established businesses seldom double and treble in size during the foreseeable pension planning horizon and worse, most will decline over time – you only need to look at the names of recently departed FTSE100 companies, including Amstrad, GEC Marconi, Telewest and Psion to understand the point.
Part of the solution is for UK pension funds to increase their exposure to earlier growth stage businesses, often those which are venture-backed by experienced professional teams. European emerging companies are today on a par with the best in the USA or Asia. These ‘sunrise’ businesses have the potential to deliver the huge growth which is unachievable from their established ‘sunset’ cousins. Consider the likes of Autonomy, Sage, Shire Pharmaceuticals and Vodafone, all of which were venture backed start-ups in recent years; businesses in which pension schemes could have had earlier and more profitable participation.
But mention venture to typical UK pension managers and they’ll look at you as if you are a character from an HM Bateman cartoon. “The man who asked for venture capital” is almost as popular as “The man who missed the ball on the first tee at St Andrews”.
So why is it that many UK pension investors avoid venture? The smart money has always understood that there will be winners and losers – but also that successful early stage businesses will be the ‘super-growth’ stars of the future and that it’s smart to get in early. Part of the answer is an aversion to risk – and for mature pension schemes with high cashflow requirements – this is understandable.
But for the majority of pension schemes, a small allocation to venture investment could help to transform the fund’s future performance. What’s more, it could also transform the fortunes of the country too; we need our best early-stage businesses – many of which are starved of cash – to be encouraged to grow, to lift the economy out of the mire. This approach has worked well in the Nordic countries and the Netherlands.
Could part of the problem be cultural? For years the brightest brains in Britain have been tempted towards the rewards of the City. Our City folk are not engineers and scientists, creating valuable new technologies and making things that people around the world want to buy. As a result, many investment managers are perhaps less in tune with entrepreneurialism than they should be. If this sounds unrealistic, you only have to compare the UK attitude with that of many European and BRIC economies. There scientists and engineers are more often business leaders; the importance of growing new businesses is more instinctively understood and venture capital investors are welcomed with open arms.
If the UK economy is to regain its vigour and renew its global competitiveness, and if schemes are to enhance their performance, we need to find ways to encourage investment in the younger businesses that will be the giants of the future. Pension funds have a crucial part to play, but unfortunately right now most UK schemes appear to have their eye off the ball and are missing the opportunity.
Ted Mott is chief executive of Oxford Capital Partners, a UK-based manager of growth capital, small buyout capital, special situations and venture capital funds.