BVCA’s Expert Panel makes recommendations to remove barriers to DC scheme participation
(Update: This has been updated to include a comment from BVCA in paragraph 4.)
September 12, 2024 (Preqin News) – The BVCA’s Pensions and Private Capital Expert Panel has published an Interim Report with recommendations to encourage more investment from defined contribution (DC) pension schemes in private funds.
The 99-page report by the UK’s association for the private equity industry calls for a wide range of actions and initiatives, including regulatory changes, focus on long-term returns, consistency of disclosure on costs, reporting, and requests for proposals (RFPs), new structures and vehicles suited to DC schemes, access to life insurance platforms for pension funds, and asset pooling to reduce risk.
While some of the recommendations and general call for investment are not new from a private capital perspective, the 18-strong Expert Panel differs in the breadth of its members, including general partners, private pension funds, insurers, and investment managers. The report was produced in partnership with the Association of British Insurers and the Pensions and Lifetime Savings Association.
‘Our Expert Panel is equally balanced between the pensions industry and the private capital industry,’ Michael Moore, Chief Executive of the BVCA, told Preqin News. ‘What we possibly lacked in the past was a serious attempt to get an understanding of each other's positions, but now we’re looking at everything from transparency to fees, performance, and structures to try and work out how we can do this better and reduce frictions. I’m not going to say we’ve cracked it, but I’m really encouraged by the collaboration.’
The panel looked at approaches taken in other countries, including the US, Australia, and the Netherlands, which is introducing a new pensions system in 2028 to transition from defined benefit (DB) to DC schemes.
Christina Theilgaard, Head of IR & Institutional Fundraising at venture capital firm Albion Capital, said many pension funds have historically been able to rely on equities and gilts to meet their target returns. She emphasized the need for comprehensive education on investment in and the performance of private capital funds, as well as how the business and operating models differ from public market funds.
‘A very positive aspect is the joint scheme by the BVCA and TEG to initiate specific educational sessions for pension funds and the regulator. We need education coming from someone who is a third party, not just from us coming in and trying to sell a fund,’ she told Preqin News.
The themes of transparency, consistency, and simplification that run through the recommendations were welcomed by Theilgaard: ‘There is definitely a requirement for some standardization for evaluation of private funds. Every single RFP that I get from an institutional investor looks completely different and has different questions. In certain industries in the US, they have standardized templates that are used by all big institutions, which makes operations easier, cheaper, and better for everyone.’
The Expert Panel made a dozen recommendations:
The pensions industry should be empowered by government and regulators to move away from short-term cost considerations to long-term returns.
Consistent cost disclosure requirements should be applied across the investment ecosystem.
The private capital and pensions industries should work together to develop a model RFP.
DC schemes, platforms, and advisors should use quarterly private capital valuations, alongside appropriate governance for unusual liquidity events, to ensure fairness between members in unit pricing.
All parties should consider in detail how far new and alternative approaches to fee structures might be made to work in savers’ interests.
As the government explores the creation of new vehicles or schemes to facilitate pensions’ investment in high-growth companies, it should draw learnings from domestic and overseas precedents.
The Financial Conduct Authority (FCA) should consider making targeted changes to the relevant regulations so that investor access is not unduly restricted and more Long-Term Asset Funds are encouraged to come to market.
The FCA should review and amend the permitted links rules.
Life insurance platform providers should continue to expand private capital options for DC schemes.
Regulators should work with industry to provide reassurance and updated guidance on their liquidity expectations for how DC schemes should handle stress events and their impact on liquidity.
DC schemes should consider the role of ‘to and through’ investing, to keep savers invested in private capital investments for longer periods.
Industry and Government should work together to determine how risk can be better pooled in DC structures, in the interests of savers. Collective DC schemes should continue to be explored.
The opinions and facts included within the above do not constitute investment advice. Professional advice should be sought before making any investment or other decisions. Preqin providing the information in this content accepts no liability for any decisions taken in relation to the above.