Private market allocations have become a “key differentiator” between DC defaults across the workplace market, according to a new report from Hymans Robertson.
The pensions consultancy says providers are increasingly allocating to private markets in the wake of Mansion House reforms, but at the same time the Value for Money (VFM) framework is expected to create greater transparency around outcomes. It says this will place increased focus on whether providers are delivering long-term value for members through their DC strategy design.
In its DC Provider Insights report, Hymans Robertson warns DC trustees and employers that they will need to regularly assess whether their provider’s approach remains the best suited to secure positive member outcomes, as the DC default strategies continue to evolve.
The report argues that private market assets can offer valuable diversification benefits and an alternative source of long-term returns for DC savers.
However, it warns that successful implementation requires careful consideration of portfolio construction, governance arrangements and manager selection.
Hymans adds that with the incoming VFM framework, trustees and employers need to engage with providers now to understand how private market allocations are being implemented, how value will be demonstrated under the new framework, and whether their current default strategy remains fit for purpose.
Hymans Robertson head of DC provider relations, Shabna Islam says: “The DC market continues to evolve as providers search for new sources of diversification and rethink how they can deliver stronger outcomes for members over the long term.
“We’re seeing an increasing number of providers incorporate private market assets into their default strategies. This isn’t just for younger members seeking growth but also across different stages of the retirement journey.
“While many providers continue to share similar headline objectives, there are increasingly important differences beneath the surface in how these strategies are constructed, implemented and governed.
“As private market allocations become more common, we expect to see greater divergence across the market. The benefits these assets can offer will depend not only on the allocation itself, but on how effectively providers implement them and oversee the associated risks. That means trustees and employers need to look beyond headline performance figures. They must challenge providers on the detail of their investment approach, ensuring it remains appropriate for their membership and capable of delivering strong outcomes over the decades ahead.”
Hymans Robertson head of DC trust consulting Anthony Ellis adds: “The new VFM framework has the potential to be one of the most significant developments in the DC market in recent years. It will increase transparency around member outcomes and encourage a more holistic assessment of value. Importantly, VfM recognises that value is about much more than cost alone helping to bring a greater focus to the long-term drivers of member outcomes.
“The framework is also likely to shine a brighter light on the differences emerging between providers as investment strategies continue to evolve. As private market investments become more widely adopted and strategy design becomes more complex, providers will need to clearly demonstrate how these decisions contribute to better outcomes.
“Trustees and employers should start conversations now. They should ask how providers expect to be assessed, how they plan to evidence value and how they are using their scale, governance and investment capabilities to improve retirement outcomes for members.”
