Twenty UK venture capital and growth equity firms have backed the newly launched Venture Capital Investment Compact, in an effort to unlock greater defined contribution (DC) pension investment in high-growth companies.

Established by the British Private Equity and Venture Capital Association (BVCA), the compact is expected to inject over £50bn of new capital by the end of the decade.

It is designed to build on the Mansion House Compact, which saw nine of the UK’s largest pension funds commit to allocating at least 5 per cent of their default funds to unlisted equities by 2030.

The news was welcomed by Chancellor of the Exchequer, Jeremy Hunt, who described the compact as a “huge win – demonstrating that our world-renowned venture capital firms stand ready to help our pension providers allocate funding to our high growth companies. This could boost British pension pots to the tune of £1k.”

As part of the new compact, signatories voluntarily committed to attracting UK pension funds as limited partners into the funds they manage, and partnering with pension investors to consider how they can produce effective investment structures to suit their needs.

Signatories will also be expected to share best practice/rules of engagement for working in private markets with DC schemes, particularly trustees and their consultants/advisers.

The BVCA has also committed to a range of measures to support the outcome of the compact, including the launch of a Pensions & Private Capital Expert Panel, and the introduction of new training programmes to help deepen the pension trustees’ knowledge of private capital and improve trustee capability.

Announcing the launch of the group, the BVCA stressed the potential value of venture capital funds, with research revealing that the UK managed Venture Capital and Growth Equity funds generated annual returns of 16.7 per cent and 12.8 per cent respectively over the ten years to 31 December 2022 – exceeding the 6.5 per cent p.a. achieved by the FTSE All Share Index.

However, the group pointed out that, according to the City of London Corporation, only 0.5 per cent of UK DC pension assets are invested in unlisted UK equities such as venture capital and growth equity.

This is despite a number of international pension schemes looking to the UK as an investment opportunity, as BVCA pointed out that Swedish pension funds were the largest source of pension scheme capital for UK venture funds in 2022.

Commenting on the launch, BVCA chief executive, Michael Moore, said: “Many overseas investors have jumped at the chance to invest in – and benefit from – the performance of innovative UK firms. UK savers must have access to the same opportunity.

“We want to seize this opportunity for British pension savers to benefit from returns garnered from VC innovation in the UK, while helping businesses to grow, succeed and create jobs.”

BVCA venture capital committee and Cambridge Innovation Capital managing partner, Andrew Williamson, also highlighted the compact as demonstration that the VC industry is committed to partnering with pension schemes to help them address the barriers they face when allocating to this asset class.

Adding to this, Pensions and Lifetime Savings Association (PLSA) Policy Board chair, John Chilman, stated: “Improving pensions adequacy for DC savers is the number one priority for the PLSA, and so we support initiatives which aim to facilitate access for schemes to more productive assets, which can include private equity and venture capital.

“As such, this commitment from the VC industry to work together with pension schemes to increase potential investment opportunities in this area is welcome, and we are pleased to be able to contribute the perspectives of our members to the work of the expert panel.”

The signatories of the new compact have over £25bn of assets under management and support over 1,800 companies, with initial backers including Octopus, Balderton and Lakestar.

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