Pension schemes are increasingly investing in alternatives like private equity, property, and hedge funds to diversify and enhance returns, with the DC market expected to triple by 2030 and major schemes like NEST playing a key role, according to the Pensions Policy Institute.
The PPI report, Pension Scheme Assets – A Deep Dive into Alternatives, highlights that pension schemes are turning to alternatives to manage market volatility, creating new opportunities for alternative investments, although DC schemes currently have less exposure than DB schemes.
The report, sponsored by the World Gold Council, notes the decline in public markets and the growth of private funds, which now manage over $6 trillion, emphasising a shift towards alternative investments for better returns and diversification.
But currently, alternative investments account for just 10 per cent of UK pension assets. Public sector DB schemes invest 37 per cent in alternatives such as real estate and private equity, whilst DC funds invest only 3 per cent in similar assets and are mainly traditional.
Meanwhile, FCA guidelines, like the Long-Term Asset Funds (LTAFs), seek to encourage more DC investment in illiquid alternatives. Furthermore, Solvency II reforms introduced in June 2024 now allow insurers to employ assets with predictable cashflows for Matching Adjustment, indicating a broader shift towards productive financing.
The report notes concerns about risks in less regulated private markets with Moody’s highlighting problems with transparency and high leverage in private debt. Additionally, the Bank of England’s June 2024 report warns that private equity’s challenges could affect the broader financial system.
But despite these concerns, alternatives are projected to grow in DB schemes and master trusts with trustees, insurers, and advisers exploring alternative investments to boost pension returns and stability. DB schemes are projected to adopt more alternatives, particularly during buyouts and transitions, while members should expect enhanced security and potentially higher benefits as alternatives gain popularity.
