Thursday, 5 April 2007

DC schemes and private equity

Just a thought but an upcoming question must be what impact, if any, the major shift from defined benefit to defined contribution pension provision will have on the flood of money going into private equity funds. It seems unlikely that any DC fund is going to include PE in its default fund (maybe I'm wrong), or offer it as a fund choice. Here's a snippet I pulled from a Bank of England report on the issue (it dates from before the big shift to DC):

“Another factor which could have a significant impact on the flow of pension fund money into private equity is the gradual move from defined benefit pensions to defined contribution pensions… [DC scheme] members are unlikely to be fully aware of venture capital or how to measure its associated risks. This lack of knowledge, together with the difficulties involved in investing very small amounts of money, will not be conducive to investment in venture capital.”

Finance for Small Firms – Seventh Report, page 55, Bank of England, January 2000.

And here's an excerpt from a release by actuaries Lane Clark and Peacock from the same sort of time also taking a sceptical line:

The nature of DC pension provision means it is highly likely that assets will be invested even more conservatively than at present. This is because an individual with a DC scheme will tend to move into cash and gilts as he or she approaches retirement to a greater extent than would not be required in a DB scheme.

Says Haines: “The increasing maturity of DB pension funds is already leading investment away from equities, towards safer vehicles such as bonds. This offset is likely to be accelerated by the move to DC pension schemes. This will mean that overall pension provision will be reduced as a percentage of each pound invested. Individuals with DC pension schemes will also find the downside risks of private equity investment far too much to bear.

Might be interesting to see what some of the really big DC funds do.

1 comment:

ilanit said...

The Los Angeles investment criteria can be just as good as 'asset-stripping' and disastrous feck-ups as private equity, so should we stop pension funds investing in public companies too? We need to focus on separating the bad from the ok.