Chancellor Rishi Sunak has confirmed that the Long-Term Asset Fund (LTAF) announced by the government in November last year is expected to launch by the end of 2021. It will allow pension funds to deploy some of its promised £500 billion into productive finance.
The government’s hope is that the LTAF will encourage pension funds to channel a portion of their large capital pools into the UK’s economic recovery following the pandemic, via investment in start-ups and growth businesses.
The government’s attention to venture capital will encourage new businesses and fresh capital to enter the market, giving it a boost which discerning investors should be able to take advantage of.
Changing the culture of pension funds
Sunak believes that, historically, UK pension funds have done little to support start-up businesses when compared to other nations, despite the UK having one of the largest pension fund industries worldwide.
Pension funds promise their participants a guaranteed level of retirement income. Traditionally, therefore, they have been conservative in their investments, focussing primarily on bonds. The lumpy returns of the venture capital market have not previously appealed to prudent fund managers and this aversion has become ingrained in pension fund culture.
However, pension funds have had to adapt to changing market conditions and a growing need to secure returns that will allow them to keep their promises. The government wants to accelerate this necessary diversifying of asset exposure through the LTAF, though Sunak acknowledges that bringing about such dramatic change may not be easy.
Are start-ups the government’s way forward?
Sunak feels strongly that giving start-ups the talent, capital and support they need to thrive is key to the UK’s economic recovery. By fuelling the development of fast-growth businesses and attracting still more to our shores, Sunak foresees the country sharing in their success, not least through the 20 % capital gains tax that the sale of a start-up attracts.
Supplemented by initiatives like the Future Fund as well as changes in the UK’s visa system (such as the expansion of the Global Entrepreneur Programme), the LTAF aims to make the UK an appealing destination for start-ups and growth businesses. In the Chancellor’s words, the government is making policy that will ‘attract the best and the brightest’, in the hope that this approach will generate returns in the not-too-distant future.
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