Consultants and trustees urge caution over increasing pension investment in UK private markets, warning that long-term member outcomes must not be compromised in the rush to meet government growth targets.
These concerns come after the announcement of the Mansion House Accord, which has seen 17 DC workplace pension scheme pledge to invest 10 per cent of assets in private markets, with half of this in UK investments.
Concerns raised included the complexity of private market assets to the potential scarcity of suitable UK investment opportunities.
One major concern is whether there are adequate attractive investment opportunities in UK private markets, giving the size of the UK pensions market. LCP partner and head of DC investment strategy Stephen Budge stressed the difficulty in identifying a sufficient volume of UK-based investment opportunities.
“One of our concerns at the moment is seeing the opportunities in the UK and seeing more of those for pension schemes to then invest in. If we’re trying to ramp up significant amounts of investment, we need to see more of those kinds of UK-based pipelines of investments.”
He also points to the challenges around the consistency of government infrastructure planning and the uncertainty this introduces for pension schemes.
He says: “We’ve heard some changes in views around major infrastructure projects, and it just highlights some nervousness in terms of pension schemes committing a lot of member money to investing in these types of assets.”
Hymans Robertson head of DC investment Alison Leslie also acknowledges these concerns. She says: “There’s a concern about the supply side, whether there’s enough to invest in. It’s hard to quantify the opportunity set, but if everyone invests at once, it could strain capacity. However, asset managers and others are keeping an eye on deal flow to ensure there are enough opportunities. It’s also about creating new opportunities for investment.”
She emphasises that UK private markets are aligned with fiduciary duty, which requires investing in the best-returning places, not automatically excluding the UK. She also highlights that private markets are a broad universe, and encompass more than just private equity.
While there is support for private market inclusion in pension schemes, experts acknowledge that integrating these assets into pension investment strategies is complex. Budge supports the inclusion of private markets in defined contribution (DC) strategies, highlighting their potential to improve member engagement and outcomes. But he notes the difficulty providers face due to the cost and complexity of these investments.
He says: ”We’re very supportive of private markets being included in investment strategies, but these are more expensive and more complex. Providers have struggled to make headway with integrating these types of assets, although some have done it successfully.”
NFP Employee Benefits regional director Martin Parish says there is a need for strong governance and robust due diligence, especially given that private market assets are often unlisted and harder for members to understand.
He says: “Will members understand the transition that’s happening within their portfolios? A heightened level of governance is required from investment managers… Governance and compliance will be key.”
He points out the risks of a rapid shift into private markets, including inflated pricing and resource constraints. “If everyone’s rushing to put money into private markets, are we going to see price increases? Will people be chasing the same investment opportunity? Where’s the resource going to come from for that?… Due diligence, governance, and risk management are going to be key to whether this delivers long-term success.”
Meanwhile, Zedra managing director Kim Nash said that trustees must ensure member interests are not overlooked amid political pressure to boost private market allocations to meet growth targets. “The focus must remain firmly on member outcomes and delivering long term sustainable returns for schemes, to maximise the value of every pound saved.” She added that integrating private assets will bring additional complexities but added: “While we work through the details of that, we must keep members’ interests at the forefront and not be driven solely by political pressure.”
Budge expresses disappointment that responsible investment isn’t a central focus of the latest agreement. He believes that responsible investment should be integral to any private market strategy.
He says: ”We’re disappointed to see that there’s not an overriding responsible investment element to this, or to a level that we were looking for. If you are investing in this way, you should also have the objective to invest responsibly. Real-world change should have been an element to how you deploy this type of commitment.”
Despite concerns around implementation and governance, Leslie remains positive about the initiative, viewing it as a ‘natural next step’ from the Mansion House Compact. She stresses that fiduciary duty doesn’t necessarily exclude UK investment opportunities and supports a voluntary approach.
She says: “We support it being voluntary, not mandatory. The default strategy in DC schemes works because providers have the expertise, even though inertia plays a role. It’s a good step forward and feels like a natural progression from the original compact.”
Leslie also emphasises the importance of protecting retail savers from complexity and liquidity issues, particularly as private markets have traditionally been excluded from retail schemes due to their complexity.
She says: “Retail pension savers aren’t included in this initiative, and it’s focused on workplace pensions. Private markets are complex and not easy to understand, which is why they haven’t been part of DC schemes historically. Retail customers should have protections and understand the investments, particularly around liquidity issues.”
Nash highlights the importance of ensuring that private market investments remain focused on long-term member outcomes, rather than being driven by political agendas. While Budge adds that momentum for private market inclusion in DC schemes is likely to be slow, and the benefits will take time to materialise:
He says: “It will take time. We’re supposed to have a trillion pounds by 2030 in DC arrangements, but we’re still talking about what the commitments are. We really need to get moving on this much more quickly so that we are investing members’ money sooner, so they can then benefit from that longer-term investment more quickly.”
Despite the slow pace, Parish remains hopeful, recognising the opportunity for significant growth in DC schemes, although acknowledging that success will ultimately be judged by long-term performance and improved member outcomes.
He says: “We’re not looking at 50 per cent in UK markets, we’re looking at 5 per cent UK, 10 per cent overall. It’s a balanced approach. But the proof will be in whether it actually boosts performance levels.”
Vidett head of trusteeship Alison Hatcher was also positive that this could help drive better outcomes for members. Hatcher says: “The collaboration and commitment that Mansion House has created amongst the master trusts, regulators and Government is encouraging to see, when aligned to delivering better member outcomes.
“The value that could be delivered through diversified investments is recognised widely and now we start to see the barriers of access to these investments start to be resolved. It provides more choice to trustee boards when considering, in line with their fiduciary duties, how best to deliver value and outcomes to the members they serve whilst also investing into the growth of the UK.”
