The push to boost private market allocations in defined contribution (DC) pensions is gathering pace, although implementation is still at an early stage. Corporate Adviser’s latest report on private markets found that fewer than half of the UK’s largest multi-employer DC pension providers had introduced private market exposure into their biggest default funds at the end of 2024, 17 months after the Mansion House Compact was introduced.
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Advisers and trustees are approaching the opportunity with a mix of enthusiasm, caution and pragmatism. At a recent Corporate Adviser round table, industry experts discussed progress and challenges to date, with a focus on expected returns, manager selection and the specific issues around UK-focused allocations and delivering wider social impact.
A question of timing
Delegates highlighted that private markets present opportunities for diversification and strong long-term returns, but this fundamental shift in asset allocation presents significant challenges for the providers and the intermediary sector. They argued that the complexity, illiquidity and higher fees on these investments require careful assessment. They stressed that considering both market conditions and regulatory or political factors was key as DC schemes could not afford to wait for the “perfect economic moment” to invest.
XPS senior investment consultant Joe Howley reflected on the necessary balance between caution and opportunity. He said: “We are very cautious. If you look back over the last few years, it’s difficult to make a strong case for private markets on returns alone, given what we’ve seen in equity markets. However, over the long term, as a DC investor myself, I do want to access private markets. It’s about figuring out which strategies will deliver over these longer time horizons, in terms of return, diversification, and value for money, given the increased fees.”
Hymans Robertson partner and head of DC investment Alison Leslie noted that while past DB experiences showed exits don’t always go as planned, the current economic environment is very different.
She said: “Given the level of due diligence I’ve seen, and because we are in a very different economic environment, I’m more comfortable looking forward. It may not deliver the spectacular returns of the past, but there is an opportunity to pick up the liquidity premium.”
For advisers, timing extends beyond markets to include political and regulatory developments. Zedra client director Joanne Fairbairn said: “I’m looking at the long-term future. I’m proud to have these types of investments as part of the DC portfolio, with big caveats. The caveats are liquidity and pricing issues. In terms of timing, I watch the political environment. We can’t afford to wait for the perfect economic moment, because by then the government may have mandated actions that we’d rather approach on our own terms.”
Aviva Investors director Joachim Sudre also highlighted the importance of timing across market cycles. He noted: “Premiums on private debt, for example, can vary significantly across different market cycles. It can really differ by asset type and market cycle and that can be very important
for allocations.”
Manager selection
One of the biggest challenges in private markets is manager selection and transparency. Fidelity International investment director James Monk explained that the quality of managers chosen will drive outcomes across the investment lifecycle.
He said: “Manager selection, from origination right through to exit, is a huge driver of returns. Ideally, there should be transparency, but in reality, it is often difficult to establish the true valuation of assets. That quality-marking process is absolutely essential.”
Leslie reinforced this point, noting that internal mandates require heightened scrutiny but can work effectively when paired with external managers.
She said: “Using multi-managers and multiple sub-asset classes within the portfolio is what we would expect for this market, because it is so complicated. Manager selection is really important here.”
Advisers highlighted the complexity of private markets, stressing that future assumptions about returns or risk are difficult to make. Isio senior DC investment consultant Adam Fisher warned: “Private markets are huge. The range of asset classes and managers is massively different. What happens going forward could have a huge impact.”
Meanwhile, Legal & General head of diversified strategies Martin Dietz noted that the industry needs expert advisers to navigate private markets. He said that unlike liquid markets, private assets move slowly and involve highly idiosyncratic strategies, making it difficult to judge performance or value for money. He said that DC advisers can benefit from collaborating with their DB colleagues, as DC strategies have traditionally been simpler.
He said: “Looking forward, it’s hard to say which particular private assets classes or private market sectors will perform and deliver value for money.”
Despite these challenges, trustees acknowledged that careful manager selection and expert guidance around private market allocations could unlock additional benefits for members, particularly when it comes to infrastructure and other socially valuable projects. Quantum Advisory principal Paul Francis noted that trustees often preferred to wait and observe outcomes before committing, but many recognised the broader advantages. “The key is how we deliver those benefits practically.”
Delegates also emphasised the importance of provider expertise. Barnett Waddingham investment consultant and head of alternative investment research Umang Rajbhandari cautioned against over-reliance on internal funds, noting the importance of choosing providers with the right expertise.
He said: “Given where rates are, it becomes really important to select the right provider, one with the expertise to find the right opportunities. Some providers just use internal funds, and those may not always be the best.”
Government influence
The Mansion House Accord requires signatories to invest 10 per cent of their DC default funds in private markets, of which half should be in UK-based opportunities. Those on the panel said this focus on UK assets is forcing trustees and providers to confront practical challenges.
However, many delegates said that despite this concentration, there was still an opportunity to offer diversification for members, and ensure that private market allocations worked effectively, aligning with members’ longer-term retirement goals.
Master trusts, which typically manage a single default fund at scale, face particular pressures, as adding private market exposure inevitably increases costs. In contrast, a number of contract-based providers already offer a multi-default strategy, with higher cost ‘premium’ defaults and lower cost options. Some providers will be looking to add private markets to their ‘premium’ default offering.
Fairbairn noted: “It’s quite hard for master trusts because they can only afford one default fund. They’ll have to achieve scale and include private markets, otherwise the government will question their approach. That pushes costs up, making it harder to compete against providers who offer cheaper options without private markets.”
Despite the added costs, uptake of private market strategies has been strong. Dietz said: “We have seen lots of support from advisers and consultants and many clients have opted in or followed guidance. There’s been a huge amount of uptake of this strategy.”
The discussion highlighted that, even with higher costs, trustees and providers are increasingly willing to navigate the complexities of private markets to meet government expectations and secure long-term benefits for members.
Member impact
Trustees are placing greater emphasis on factors beyond pure financial returns, with fiduciary duty increasingly encompassing social and environmental considerations. Corporate Adviser’s private markets report found that seven in 10 advisers believe DC trustees should take these wider impacts into account, using investments as a means to support the society in which members will retire.
Monk highlighted the responsibility trustees and providers bear in guiding members through complex decisions. “Private assets are complex, and members rely on providers’ solutions. It’s our duty to deliver and show courage in our convictions about what is best. Members may not have a preference over private assets, but we need to act in their long-term interests. This is especially important when considering beliefs
such as Shariah compliance, which are fundamental to some members rather than financial principles.”
The round table revealed that while members may not fully understand private assets, trustees and advisers are willing to embrace solutions that reflect long-term impact, provided they are communicated effectively and structured responsibly.
Private markets are increasingly on the radar for DC schemes, offering the promise of diversification and enhanced long-term returns. But delegates were clear that these opportunities come with significant complexities and realising their potential requires a disciplined approach.
They noted that selecting the right managers and communicating risks, costs, and benefits clearly is essential. Given this complexity, it is unlikely that private markets will ever be a one-size-fits-all solution, but schemes that combine strategic timing, expert manager selection and clear value-for-money considerations can deliver sustainable outcomes aligned with trustees’ fiduciary duties and members’ retirement goals.
