The move could help 'scale-up' companies in the life sciences sector in particular obtain access to the finance they need to grow, Russell Booker, a specialist in corporate transactions at Pinsent Masons, the law firm behind Out-Law.com, said.
"Given the amount invested in pensions, a fairly small increase in the proportion invested in patient capital by pension funds could have a large impact," Booker said.
The plans to attract greater levels of investment in innovative UK businesses from pension funds were outlined by the Treasury (34-page / 564KB PDF) in its response to feedback it obtained to a consultation it ran earlier this year as part of its patient capital review.
The Treasury opened the review earlier this year in a bid to "identify barriers to access to long-term finance for growing firms". It has defined 'patient capital' as "long-term investment in innovative firms led by ambitious entrepreneurs who want to build large-scale businesses".
The Treasury said: "Some pension investors perceive the current interpretation of regulations to act as a barrier to investment. To respond, the Pensions Regulator will clarify guidance on how trustees can invest in assets with long-term investment horizons, such as venture capital, infrastructure, market-returning investments that have a social side benefit and other illiquid assets in a diverse portfolio."
"This will give pension funds confidence that they can invest in assets supporting innovative firms as part of a diverse portfolio. With over £2 trillion in UK pension funds, small changes in investment have the potential to transform the supply of capital to innovative firms," it said.
In its response paper, published alongside UK chancellor Philip Hammond's broader Budget plans, the Treasury also announced plans to set up a new multi-billion pound fund to provide long-term investment to innovative UK businesses.
The Treasury said that £2.5 billion of public money would be invested through the fund, and that co-investments from private investors would take the total investment up to £7.5bn over the next 10 years.
The new fund will be managed by a new subsidiary to the British Business Bank (BBB) that the government said will be set up for that specific purpose. It said the new entity will "become a leading UK-based investor in patient capital across the UK".
"[The fund] will be set up with the intention to float or sell in part or full once it has established a sufficient track record and in line with State aid rules," the Treasury said. "Its investment strategy will seek to provide capacity to the market that would not otherwise be there while achieving a commercial return on its investments. It will also provide transparency to other investors about its investment strategy and returns."
Among the other measures outlined by the Treasury were plans to use public money to spur "a series of private sector fund of funds" that could provide long-term capital to growing, innovative UK businesses.
"The first wave will be seeded by up to £500m of investment by the British Business Bank," the Treasury said. "This will attract new investors into UK patient capital of sufficient scale to have a meaningful impact. We expect this investment to catalyse the formation of up to three fund of funds with the ratio of public to private capital in the first wave estimated at around 1:2. The launch of individual fund of funds will potentially be staggered over time. Up to two further waves of investment will be launched, unlocking up to £4 billion in total of new investment."
The Treasury also pledged to make changes to two existing schemes that are designed to help smaller, higher-risk companies to raise finance. The Enterprise Investment Scheme (EIS) and Venture Capital Trusts (VCTs) scheme provide a range of tax reliefs to individuals who acquire new shares in such companies.
Under the changes, investors will be able to invest double the amount they can currently invest annually without losing the benefits provided by the EIS or VCTs schemes.
"The annual investment limit for EIS investors will be doubled from £1 million to £2m, provided that any amount above £1 million is invested in knowledge-intensive companies," the Treasury said. "The annual investment limit for knowledge-intensive firms will be doubled from £5m to £10m through the EIS and by VCTs. Greater flexibility will be provided for knowledge-intensive companies over how the age limit is applied for when a company must receive its first investment through the schemes."
A stiffer "principles-based" test designed to stop "tax-motivated investments" from benefiting from the advantages provided under the EIS and VCTs scheme is to be introduced under the Finance Bill 2017-18, it said. HM Revenue & Customs (HMRC) will publish guidance on the test when the Bill is published.
"The new test will ensure that the schemes are focused towards investment in companies seeking investment for their long-term growth and development," the Treasury said. "The new test will not affect independent, entrepreneurial companies seeking to expand."
"The new ‘risk to capital’ condition depends on taking a ‘reasonable’ view as to whether an investment has been structured to provide a low risk return for investors. The condition has two parts: whether the company has objectives to grow and develop over the long-term (which mirrors an existing test with the schemes); and whether there is a significant risk that there could be a loss of capital to the investor of an amount greater than the net return," it said.