Pension investment into private markets can support greater engagement among DC members, and may drive up contribution rates, according to research from Legal & General.
L&G’s latest annual DC research found that the majority of DC savers 68 per cent said they would prefer to invest in schemes with allocations to private markets, if this included assets such as affordable housing and clean energy.
The research found that at present levels of pension engagement remain low; over half (58 per cent) of DC savers did not know that their pension funds can be used to change the way companies and society operates.
The research found that almost three out of four (68 per cent) DC savers agreed they would feel more engaged with their pension if it was invested in assets like affordable housing. Meanwhile 63 per cent said they would feel more engaged if their pension was helping to drive the energy transition, with 57 per cent saying allocations to spin-out businesses from university science and technology departments would boost their engagement.
The research found that better engagement can lead to higher contributions. More than half of respondents agreed that they would be inclined to pay more into their pension if it was invested in affordable housing (55 per cent) or for allocations to clean energy (52 per cent) — with 49 per cent saying the same for schemes that invest innovative start-ups.
Alongside the societal benefits, respondents also recognised the potential enhanced returns private markets can offer – 60 per cent of respondents said investing in affordable housing could result in better returns for their portfolio, while 58 per cent of savers believe that investing in clean energy has the potential to offer better returns.
In further research, L&G has also polled DC scheme decision makers about their attitudes to the future of their private market allocations.
Just as members report a preference for their pensions to invest in environmental and socially orientated assets, DC schemes are also prioritising these outcomes in their private market investments, with 80 per cent saying this trend is set to accelerate over the next two years. The climate transition, digital transformation & AI and healthcare hold most appeal for DC schemes, when considering thematic opportunities in private markets.
When focused on environmental outcomes, schemes overwhelmingly say clean, renewable energy infrastructure is their biggest priority (87 per cent), followed by transmission assets (47 per cent). From a social perspective, half (50 per cent) of schemes believe social issues in private market investments will enhance long-term returns, with 43 per cent prioritising allocations to affordable housing.
The research also found that DC savers are mindful of the broader considerations that need to be factored into investing in private markets, with 82 per cent of those polled concerned around there being potentially more risk of an investment loss, when compared with traditional investments.
Notably, these concerns were higher among older generations, with 73 per cent of respondents aged 50+ worried that investing some of their pension money in assets that might not be quickly sold could carry the risk that they will not be able to easily access their pension money when the time comes.
The research highlights that Millennials and Gen Zs are particularly positive about the integration of private markets into their pension portfolios, with 74 per cent of these respondents saying would feel more positive about their pension if their funds were being used to help support affordable housing schemes, given the challenges facing these generations in getting onto the housing ladder.
In addition a total of 81 per cent of Generation Z would be willing to pay more for a pension which was helping to drive forward technology and innovation in the UK, compared with 51 per cent of baby boomers.
Legal & General head of defined contribution Rita Butler-Jones says: “Greater pension engagement is a puzzle the UK pensions industry has been trying to solve for decades.
“As we see growing allocations of pension capital to private markets, it is encouraging that when savers are aware that their pensions can be used to drive positive real world change, it fosters an increased sense of engagement, wellbeing and connectivity with their retirement pot. Private markets could therefore not only help to drive greater potential returns across UK pensions, but potentially greater member engagement and contributions too.
“We are committed to opening up private markets for DC savers, which is why earlier this year we launched the L&G Private Markets Access Fund. We want to inspire DC members into greater engagement with their pension by investing in tangible assets which can aim to benefit the real economy, while also providing access to the potential returns on offer through private markets.”
L&G launched its Private Markets Access Fund in July 2024. The fund is designed to offer DC schemes a single point of access to a diversified portfolio of private market assets, including affordable housing, clean power infrastructure and university spin-outs.
The fund formed a key part of L&G’s strategic update in June,, in which the company announced its intention to scale up its £52 billion private markets platform and target growth in its workplace defined contribution pensions business.
This includes opening up access to existing strategies such as the L&G Clean Power (Europe) Fund and the L&G Build to Rent Fund, as well as new strategies such as affordable housing, to meet DC pension client demand for private markets exposure.