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Why are DC workplace schemes increasing investments into private markets?
Government policy and regulatory changes have opened the door for defined contribution (DC) schemes to significantly boost their allocations to private markets and productive finance. While this may seem like a new area, providers have been investing in these asset classes for years through defined benefit (DB) schemes. However, new investment vehicles and structures now make it feasible for DC schemes to access a fuller range of private market assets.
The industry is on the cusp of change. Five years, it may seem surprising that large DC schemes once lacked substantial allocations to this asset class.
How will private markets deliver better outcomes for DC savers?
In recent years, DC default strategies have increasingly focused on growth. Within the next decade the majority of retirees will rely solely on DC pensions— rather than a mix of DB and DC plans— so investment strategies need to deliver strong returns for savers.
Private markets play a key role in achieving long-term growth. Historic modelling from the DB sector shows diversifying portfolios into more illiquid assets, including private equity, infrastructure, private debt, and real estate, can generate superior returns. For someone starting their career in their 20s, this approach could boost pension returns by as much as 30 per cent over their working life, compared to a traditional 60/40 mix of listed equities and bonds.
Importantly, it’s not just about returns. Private markets can also help reduce shorter-term volatility, particularly when compared to 100% equity strategies. As a result private market assets, like private debt and real estate, have an important role to play in de-risking portfolios as members approach and enter retirement and begin accessing pension savings.
Is now a good time to invest in private markets?
There is a clear opportunity for workplace pension schemes to invest more in the UK. We have seen overseas pension schemes and sovereign wealth funds invest in innovative UK start-ups and infrastructure, to the benefit of their investors. Now, UK DC members have the opportunity to participate in these sectors too, potentially boosting returns for members and helping drive domestic economic growth, to the benefit of everyone.
But we are also witnessing a generational global shift towards more sustainable economies. Companies across all sectors are prioritising sustainability agendas, driving significant investment into cleaner, greener technologies.
This isn’t solely about reducing carbon emissions or achieving net zero. It’s also about technological advancements, such as artificial intelligence and other innovations, that will hopefully power a more sustainable and fairer economy. Many of these developments are being financed through private markets, presenting exciting opportunities for investors.
While political debates around specific ESG and climate goals may persist, the direction of travel is clear. By increasing allocations to private market investments, Standard Life’s Sustainable Multi Asset default ensures members not only support the transition to a lower-carbon economy, but will also benefit financially from this shift.
How is Standard Life integrating private markets into its default strategy?
Standard Life benefits from being part of the larger Phoenix Group, where scale is a significant advantage when it comes to investing in private assets.
Through Phoenix’s partnership with Schroders, a specialist asset manager in this area, Standard Life is using its default funds to fund two new Long-Term Asset Funds (LTAFs), managed by Schroders — one focused on the UK and the other with a global remit. These strategies are already live, but the long-term ambition is to create a fully private markets default strategy with a substantial allocation to a diversified mix of illiquid assets.
The portfolio design will be outcome-focused, ensuring that liquidity is managed appropriately for members who will eventually access their savings.
At Standard Life, the target for the workplace default strategy is to help members on average contributions achieve at least a moderate standard of living in retirement, as defined by the Pensions and Lifetime Savings Association (PLSA). Incorporating private markets along the glide path is a key step in meeting this objective.
This strategy is not a tick-box exercise, or an attempt to shoehorn private assets into a narrow fee structure. Instead, it’s about seizing an opportunity to make a meaningful difference and delivering value to members.
By investing in private markets, Standard Life aims to deliver a compelling and impactful proposition — delivering better outcomes for members while supporting broader economic and environmental progress.
