Pensions – A virtuous circle

Everybody's living longer, which is fantastic, but the pensions industry is a bit of an issue. We have a world where you might be living to a hundred. That means what used to be your retirement age could be almost a third or even more of your lifespan. We don't want to go into poverty when we retire, so pension plans provide for that social security. In a low-interest-rate environment like the one we are in, you need to take a certain amount of risk or diversification. That's what private equity offers.

In simple terms, a pension is actually the money that any citizen or employee sets aside during their working career for their retirement, but it's also vital for the economic vibrancy of a country, providing long-term capital for businesses to grow, which of course is the building block of civilization and for a higher standard of living. The pension seems something ubiquitous, something that we've always had, but really it's only quite a modern construct. Pensions only started in 1913 in the U.S. and in 1925 in the U.K. Pension plans typically invested in non-risky assets; they were invested mainly in bonds. You were meant to finish working when you were physically unable to work anymore. This was a safety net to make sure you were fed, housed, clothed, and had a reasonable standard of living, and by reasonable, I mean you weren't starving until you died.

What we have now is everybody living longer, which is fantastic, but the pensions industry is a bit of an issue. We're very good at thinking about tomorrow—my hairdresser appointment and that sort of thing—but we're very bad at thinking about things that are 30, 40, 50 years out, which I think is what created what we’re calling the savings gap. The pension provider or your insurance company has to make this amount of money you've been paying in stretch all the way to the end of your life. Getting this right is quite a task, and that's where investment comes in.

Pension funds have three alternatives to generate return. The first is to invest in government bonds. The second is to invest in public markets. The third is to invest in productivity. The difference between private and public equity is simply the ownership structure. Manchester United is still public, whereas Chelsea is a private football club. Arsenal were on the stock market and now they’re owned by a family. So it's all about the ownership, not about the type of business.

There were a few films in the 80s and 90s that demonized the activity as “assets dripping,” getting people rich and leaving companies dry. This could not be further from the truth. In practice, private equity has either control or very heavy influence in the company and can really help the growth path of a company. What is different is that it's long-term capital. The private aspect of private equity is really key. People don't worry as much about short-term fluctuations; they're able to simply invest for a period of time and not have to worry about the share price going up and down. They are investing capital and bringing expertise in order to help those companies grow, improve their performance, and ultimately create jobs.

That's how I would describe this virtuous circle between private equity and pensions. Private equity is hugely important to pensions because it provides a return that has over time been consistently higher than the public markets, and that difference in return makes a huge difference to how much ultimately you'll get when you retire.