Private market investing could play a larger role in the evolution of pension defaults in the UK over the next decade, according to new analysis from Standard Life and WPI Economics.
The report, From Scale to Impact: A Blueprint for the Future DC Pensions Market, explores how consolidation and pension reforms could reshape how default funds invest. It sets out how larger schemes could build more diversified portfolios and increase exposure to private markets.
With a long-term outlook, the research projects that the UK workplace DC market could be dominated by 10 to 15 larger pension schemes by 2035, each managing more than £50 billion of assets. Under this scenario, default funds could potentially allocate between 15% and 30% of assets to private markets during the growth phase of retirement saving, compared with around 2% to 4% today1.
It’s also anticipated that the range of private assets within defaults will broaden. Rather than concentrating exposure in a single asset class, the blueprint sets out a scenario in which future default funds invest across a broad mix of private market assets. Private equity and venture capital could account for 30% to 50% of private market allocations, private credit 20% to 40%, and infrastructure and real assets 20% to 40%2. This mix could support more diversified portfolios and stronger long-term outcomes for savers by combining different sources of return and risk.
The report suggests private credit is likely to play an increasingly important role in helping schemes manage liquidity and downside risk. Infrastructure investments could provide long-term, inflation-linked cashflows and diversification benefits, helping to smooth returns over time, while private equity and venture capital are expected to remain important drivers of long-term growth and value creation.
The findings indicate that UK DC schemes could begin to look more like their international counterparts. Australian superannuation funds currently invest around 17% of assets in private markets, with some growth-stage strategies allocating up to 40%, while Canadian public pension funds allocate around a quarter of assets to private markets. However, the composition of those allocations differs. Australian investors have tended to place greater emphasis on infrastructure and real assets, while Canadian funds typically allocate more heavily to private equity and venture capital. The blueprint suggests future UK default funds are likely to draw on both approaches, combining infrastructure's diversification and inflation-protection characteristics with the growth potential offered by private equity and venture capital.
While maintaining global diversification, the report argues that future schemes are likely to retain a meaningful domestic bias within their private market allocations. It estimates that 30% to 50% of private market investments could be allocated to UK opportunities, compared with around 5% to 10% of listed equity investments. As private market allocations grow, this could materially increase the volume of pension capital flowing into UK infrastructure, businesses and other productive assets.
By 2035, the report estimates that between £40 billion and £200 billion of DC pension assets could be invested in UK private markets under this approach, compared with an estimated £2 billion to £3 billion invested in private markets by today’s master trusts.
Jenny Holt, Product Director at Standard Life, said: "Interest in private markets has grown significantly in recent years, but adoption across the workplace pensions market is developing at different speeds.
"This research explores how the DC market could evolve over the longer term if schemes continue to consolidate and gain greater scale. In that environment, larger schemes may be better placed to access a broader range of investment opportunities and build more diversified portfolios.
"Ultimately, the focus should not be on allocation targets alone, but on the value private market investments can deliver for members. Different schemes are likely to take different approaches as the market develops, but any investment strategy should remain focused on improving member outcomes, delivering value for money and being supported by strong governance and a clear investment rationale."
Joe Ahern, Director of Policy at WPI Economics, said: “Scale changes what pension schemes can invest in and how they invest. Larger schemes are better positioned to access a wider range of opportunities, build specialist expertise and construct more diversified portfolios across different private market asset classes.
“The challenge now is ensuring the wider regulatory and commercial environment supports schemes in accessing those opportunities while maintaining a relentless focus on delivering value for savers.”
The report argues that greater scale, a stronger focus on value rather than cost, and reforms to support investment in illiquid assets will be necessary if schemes are to adopt these strategies at scale while maintaining a focus on delivering good pension outcomes for pension savers.
|
