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Walk on the Wildside? Pension funds look set to invest in fintech following reform

Rishi Sunak appears to have taken Ron Kalifa’s suggestion on board around tapping into the £6 trillion currently sat in pension funds for fintech investments.

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Rishi Sunak (far left)/HM Treasury

In only his second budget as Chancellor, Rishi Sunak has announced a consultation into reforming pension fund rules that could encourage investment in startups and fintech.

It follows one of the recommendations published in the Kalifa review last week, which included the suggestion that pension funds could make riskier investments, dipping their toes into unlisted fintechs.

The idea had been thrown around before but was given a boost last week when Ron Kalifa suggested that the £6 trillion currently held in private pensions in the UK could be a great source of funding for the fintech sector. 

In the report, Kalifa mentioned that a small slice of this pot of cash could be “diverted to high growth technology opportunities like fintech,” with the Chancellor confirming that this could soon be a possibility in his budget on Wednesday. 

Sunak said: “As well as support for innovation and access to talent, high growth firms need access to capital.”

“To do that, we’re taking steps to give the pensions industry more flexibility to unlock billions of pounds from pension funds into innovative new ventures launching a new Future Fund Breakthrough, to help fill the scale-up funding gap and changing the rules to encourage more companies to list here.”

Within the next month, the government will launch a consultation to look into whether or not the very strict rules placed on pension funds could be relaxed.

Currently, pension funds operate under tight rules around their investments which leads them largely to prioritise bonds and large-cap equities, plus they operate under a 0.75 per cent charge cap on all auto-enrolled pensions in the UK.

The government will look into whether or not the tight 0.75 per cent charge cap prevents pension pots from taking a more active approach in investing in higher-risk companies, like many fintechs.

Charlotte Crosswell, CEO of Innovate Finance, said: “The announcement of future reforms to pension fund and listings rules will cater to the changing dynamic of our listing and capital raising environment, providing options for growth and patient capital to the fintech sector.”

“We were also delighted to see the focus on the fintech sector in the Build Back Better growth plan and look forward to the Kalifa Review recommendations being advanced over the coming months.”

Despite the potential boost for fintech, it has left others in the industry wondering if the herculean task of reforming pensions will ever happen and at what cost. 

Romi Savova, CEO and co-founder of PensionBee, said: "In order to allow investment in venture capital and growth equity while staying within the default charge cap, the scope of the cap will have to change. At best that would mean more complexity, and at worst it could result in negative outcomes for consumers."

"In the past, we have seen that multiple differing interpretations of charge cap compliance can erode pension pots. Higher risk-adjusted returns are not necessarily associated with higher fees and the size of performance fees is a hotly disputed topic. Pensions are for savers - they are not political piggy banks."

The move is still not a dead cert, with pension innovation being notoriously slow (just take a look at the PDP), but it is a step in the right direction and a potential win for fintech down the line, that is, of course, if the changes ever actually make it over the line. 

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