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Trustees and pension providers have a substantial responsibility to ensure they’re maximising default fund returns – while remaining in line with an ‘average’ investor’s risk appetite – over the long term. In recent years, changes in regulation and the increasing scale of pension scheme assets supported by auto enrolment have unlocked access to new asset classes, previously out of reach for defined contribution (DC) default investors.
Why invest in private markets?
Aegon is one of the first large pension providers to introduce private market investment – and there are good reasons for us to do so.
Integrating private markets into default funds expands the spectrum of companies that these funds can invest in, increasing diversification which can potentially drive higher risk-adjusted returns. Companies are staying private for longer and private capital is financing innovative and fast-growing businesses, not available in public markets.
Defined benefit (DB) schemes have a long track record of investing in private markets. However, they are new to DC, and making such investments requires careful consideration of a range of factors including cost, liquidity, minimum investment amounts, governance and regulation.
Integrating private markets within a DC default fund takes significant planning. We believe the winning formula is a combination of solution design, scale, experienced management and having the right investment vehicle.
The importance of structure and scale
The introduction of Long-Term Asset Funds (LTAFs) has made it easier to efficiently invest in private markets. These structures help trustees and DC pension providers ensure they’re operating within a regime that provides sufficient investor protection for workplace savers.
A key factor is how any private market investment performs and impacts the overall default fund. Choosing the right private markets managers, and conducting robust due diligence, is key to setting these funds up for success.
Given the relatively illiquid nature of these investments, it’s crucial to have a robust risk management framework in place to ensure that future redemption requests can be honoured without significant impact on the overall fund.
Managing the liquidity and complexity of private market investments can often result in higher fees and costs. However, by using their scale, larger pension funds can spread costs over a wider asset base, reducing the overall cost per investment. This is vitally important to make private market investments viable in the context of a rightly cost-conscious default fund market.
All of this requires strong governance structures with regular monitoring and reporting to ensure the LTAF is performing as expected and adheres to Financial Conduct Authority (FCA) regulations.
Driving responsible investment
Many private investments within LTAFs have a focus on sustainable projects such as renewable energy and social infrastructure, contributing to positive environmental and social outcomes.
For Aegon, this means that our investment in private markets will support our aim to halve greenhouse gas emissions for our pension default fund range by
2030 and to achieve net-zero emissions by 2050¹. It also significantly supports our desire to invest £500 million in climate solutions by 2026; investments that directly contribute to climate change mitigation and/or adaption.
We expect many of these solutions to come from unlisted equities, aligning with our aim, as a founding signatory of the Mansion House Compact, to invest at
least 5 per cent of our default fund assets in unlisted equities by 2030. By providing capital for long-term projects, LTAFs can
also support infrastructure development and business growth, contributing to economic development.
A broader range of investment opportunities
Private market investing in DC pensions requires careful consideration and management. However, the benefits for scheme members are clear. Private markets not only offer members potentially improved risk-adjusted returns, but also increased diversification, due to the lower levels of correlation with public markets and an opportunity to invest in young companies at the forefront of innovation in high growth areas of the market.
