GLASGOW, SCOTLAND - OCTOBER 07: The moon rises behind the turbines of Whitelees Windfarm on October 7, 2014 in Glasgow, Scotland. Whitelee Wind farm is the largest windfarm in the UK. (Photo by Christopher Furlong/Getty Images)
Unit-linked funds will be able to invest in illiquid infrastructure assets such as wind turbines, under the regulator’s proposals © Christopher Furlong/Getty Images

Investors should be given greater access to infrastructure projects and UK start-ups via their pension funds, according to a consultation from the UK financial regulator designed to meet the Treasury’s goal of using pensions to fund nascent UK business.

The Financial Conduct Authority unveiled a package of proposals on Wednesday designed to boost investment by unit-linked funds, used in defined contribution pension schemes, into patient capital.

Patient capital encompasses illiquid assets like private equity and investments in early-stage companies, and has been at the heart of a government push to stimulate funding for the UK’s brightest start-ups.

The Treasury has committed to unlocking £20bn in patient capital during the next decade and said in the 2017 Budget that pension funds could “transform” the flow of capital into the most innovative and “knowledge-intensive” UK start-ups.

Defined contribution pensions are set to account for more than £1tn in assets by 2025 and could be used to give retail investors better access to illiquid, long-term assets like direct infrastructure and private equity investments, according to the FCA.

Under the regulator’s proposals, unit-linked funds would be able to invest in illiquid infrastructure assets such as wind turbines, rail tracks and roads, providing certain consumer protection measures had been met.

The FCA also suggested increasing the current limit on certain assets such as land and property from 10 per cent to 50 per cent and said the current limits applying to specific illiquid assets should be amalgamated into a single threshold.

The rule that funds should be able to sell any unlisted security in the short term should also be scrapped, said the FCA, providing funds could prove sufficient liquidity across the entire portfolio.

The Treasury first unveiled plans for the FCA consultation in the 2018 Budget, when it said pension funds would be supported to invest in nascent UK companies through pooled investments in so-called patient capital investments, through the British Business Bank.

Several large defined contribution pension providers in the UK, including Aviva, HSBC, L&G and Nest, had already committed to work with the British Business Bank at that point to explore options for pooled investment in patient capital.

Caroline Escott, policy lead on investment and stewardship at the Pensions and Lifetime Savings Association, said the “uncertain economic and financial climate” and low interest rate environment meant it was “more important than ever” for schemes to have access to a wide range of investment opportunities.

“Defined contribution schemes have particularly long investment time horizons and are therefore especially well-placed to consider illiquid investments as part of a balanced portfolio,” she said.

On Wednesday the regulator also published a discussion paper looking at how UK authorised funds used by a broad range of UK retail investors could invest in patient capital.

The paper made no proposed changes to authorised fund rules but said it would consult on responses and take a view as to whether rule changes were necessary to remove barriers to other kinds of investment fund investing in patient capital.

The FCA said funds should have to meet certain consumer protection criteria in order to meet the majority of its changes for unit-linked funds, in order to avoid putting retail investors in undue risk.

Responses should be submitted by February 28, 2019, the FCA said.

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