TO DOWNLOAD A COPY OF CORPORATE ADVISER’S PRIVATE MARKETS REPORT CLICK HERE
What is driving the private markets agenda?
First and foremost is this drive to deliver improved returns and better outcomes for members. Investing in private markets is now a credible way to achieve this as DC has grown in size and scale and can access these investment opportunities.
Providers like Legal & General have experience and understanding of this asset class throughout DB business — and have been exploring this opportunity for a while. At the same time we have seen regulatory change to facilitate this. This is being driven by the Government’s policy to encourage more investment into productive finance and the UK economy — be it investment into social housing, green infrastructure or the hi-tech and AI start-ups being spun out of UK universities. But it isn’t all about domestic UK investments. There are exciting private market opportunities overseas, particularly in emerging markets, in relation to the climate challenges and helping these economies transition away from fossil fuels. Done right, this can be a win-win situation, driving UK economic growth, supporting broader societal changes, addressing the climate challenge while also delivering returns for individual members.
How are members’ interests protected when assessing private market investment opportunities?
Pension scheme trustees have a fiduciary duty to look after the longer-term interests of their members. There is debate, including one recent legal opinion, suggesting this duty might also take into account the world into which members are retiring. But we need to be absolutely clear that while this is a consideration, the number one priority remains members’ long-term financial interests. The challenge is to ensure schemes, their investment managers and trustees understand the risk and return profile of potential private market investments, which might be very different from traditional equity and bond holdings. It’s important to remember this isn’t a single asset class, but will include real estate, infrastructure, private equity and private debt — which might offer very different investment opportunities.
What barriers remain when it comes to DC investment into private markets?
There has been considerable progress in tackling the historic barriers that have hindered DC investment into private markets. There’s been a lot of work done with fiduciaries, trustees and advisers to address the potential governance and knowledge gap, and there is a lot more specialist knowledge about these assets.
The operational complexities are also being addressed, with platforms now able to offer access to these assets. We’ve also seen a lot of innovation around product design and fund structures. These are helping find new ways to offer access to illiquid assets but in a way that facilitates DC operational requirements to offer daily liquidity and dealing. However, the cost element continues to be a challenge, particularly against an economic background of strong equity returns over the past 15 years. Private markets have the potential to deliver better outcomes for members over the longer term, particularly as they offer increased diversification. The challenge is to shift industry thinking from costs to overall value.
How can these investments drive societal change — and what does this mean in terms of engaging pension savers?
There are a number of ways that pension savings can deliver positive changes. On the one hand we have innovative start-up companies that are developing new technology. We’ve seen some really exciting developments, for example in battery storage, which can really help when it comes to renewable energy. But private markets investment also offers the opportunity to invest in areas such as affordable housing, transport upgrades and healthcare — the building blocks of modern life that can make a real difference to people’s lives. From the surveys we’ve done we know members are really supportive of such initiatives, and want to see pension funds investing in areas that can make a real difference to their lives, whether it’s high-quality affordable rental properties, or measures to enhance the UK’s energy security.
These investments can be an excellent springboard to help boost pension engagement, and be a useful way to broaden people’s understanding of pensions. This should help members make better savings decisions, particularly around retirement. If people feel more positively about where their pension is invested it can encourage them to contribute more, helping to address one of the fundamental challenges we face as a society: saving enough to fund a comfortable retirement.
