The UK's burgeoning startup scene is facing an unexpected hurdle: regulatory red tape hindering pension fund investments, which could jeopardise the nation's £160 billion pension industry's 2030 target to channel more capital into high-growth businesses. Aegon, one of the largest pension providers in the UK, has sounded a warning that existing frameworks are significantly slowing their pledged investments.
As part of the Mansion House Compact, agreed three years ago, ten major firms, including Aviva and Legal & General, committed to invest at least five per cent of their default defined contribution (DC) funds into unlisted equities by 2030. However, Lorna Blyth, Aegon's managing director, investment proposition, highlights that crucial regulatory 'building blocks', such as alignment on performance fees and clearer guidelines on 'conditional permitted links', are still not fully established.
The 2015 law capping total annual fees on default DC pension funds at 0.75% of a pot's value has created significant hurdles for the industry. While designed to protect savers from excessive charges, this cap makes it challenging to invest in private market assets like venture capital and private equity, which typically involve performance-based fees that can push total costs beyond this limit. Trustees are reportedly hesitant to invest in these areas due to fears of breaching the cap, thereby limiting access to potentially higher-growth opportunities.
Regulatory rules from the Financial Conduct Authority (FCA) concerning 'permitted links' also pose a significant barrier. Many fund structures commonly used in private capital markets, such as closed-ended venture capital and private equity vehicles, do not comply with the FCA's requirements, which are designed to safeguard savers from overly risky investments. Although the FCA introduced Long Term Asset Funds (LTAFs) to address this, providers have noted that these wrappers are often expensive to set up and involve lengthy approval processes.
Despite these challenges, some progress has been made. Aegon has exposure to private equity through its Life Path and Universal Balanced Collection strategies, and Standard Life has also moved forward via a joint venture. However, the Association of British Insurers (ABI) revealed in October 2025 that total exposure to unlisted equities had only reached 0.6% of committed assets, amounting to £1.6 billion. This figure represents a mere 0.24 percentage point increase year-on-year and indicates a considerable distance from the five per cent target with just over four years remaining.