Defined contribution pensions could significantly boost their returns by adding venture capital and growth equity to their investments, according to a report from the British Business Bank, a state-owned economic development bank, and global management consultancy Oliver Wyman.
The report suggests defined contribution plans expand their investments to more than just listed assets. The bank said that based on long-term historic performance, venture capital and growth equity have delivered an average return that is seven percent higher than public equities each year, net of fees.
In addition to higher returns, the report says including venture capital and growth equity investments would help diversify and reduce the volatility of portfolios. Those asset classes provide exposure to sectors that are better-represented in private markets and have a relatively low correlation the broad market.
Because of these advantages, data in the report shows that retirement savings for the average 22-year old could be increased by as much as 12% if plans made a 5% allocation to venture capital and growth equity.
Returns increase for middle age plan participants. AThe report said that a 35-year old with £25,000 ($30,700) currently invested in retirement savings could see a 6% to 10% increase in their lifetime retirement savings, while a 45-year old with a £50,000 in pension savings could see a 6% to 7% increase.
“It is incumbent on defined contribution pension schemes to consider how to include investments in the UK’s fastest growing and most innovative companies,” Keith Morgan, CEO of British Business Bank, said in a statement.
However, investing in venture capital and growth equity through a defined contribution plan is easier said than done. The investments are inherently riskier than equities and bonds., Venture capital and growth equity fund fees are typically significantly higher than those associated with many other asset classes as well. The report suggests that plan sponsors could onboard venture and growth equity via comingled funds to keep fees in check.
The study analyzed the performance of over 5,000 funds globally and completed interviews with experts from more than 50 organizations in the pensions, venture capital, and growth equity sectors, as well as regulators and those in government.Related Stories: