A more diversified investment approach through greater allocation to private market assets could improve long-term returns for defined contribution pension savers.
This is according to Standard Life’s blueprint for successful UK DC pension transformation, which comes amid growing concern around retirement adequacy in the UK.
The paper ‘From scale to impact: A blueprint for the future DC pensions market’, published in partnership with WPI Economics, finds that achieving better outcomes for pension savers will require a significant structural shift to a more consolidated pensions market, with 10-15 large megafunds expected to emerge by 2035.
Greater scale would enable schemes to invest more effectively across a wider range of assets, particularly private markets, where allocations could rise from around 2-4% today to 15-30% during the growth phase in future default funds.
The research suggests that under the proposed approach pension pots could increase by between 4% and 20% at retirement. It estimates that an early career-saver could have up to £49,000 more in their pension pot, while a mid-career saver could see up to £17,000 in additional savings.
Alongside improved outcomes for savers, Standard Life said the proposals highlight the potential for pensions to play a much greater role in financing UK growth.
By 2035, the DC pensions market is expected to reach up to £1.8 trillion in assets. Between £40 billion and £200 billion could be invested in UK private markets under the proposed approach, which could support infrastructure investment generating up to £115 billion in GDP.
Eight principles
To support a new era of “value-focused retirement saving”, the report has set out eight principles it believes will be critical to delivering the full benefits to savers and the economy:
1. Establishing a clear, consistent and outcome-focused regulatory framework
2. Equal levels of protection for all members
3. Shifting from a cost-focused to a value-focused approach, enabling investment across a wider range of assets, including private markets
4. Ensuring intermediaries drive competition and value
5. Strengthening governance through highly skilled trustees
6. Aligning pensions with wider economic and industrial strategy
7. A system that supports all to save
8. Supporting effective and sustainable access to retirement income
Andy Briggs, Group CEO of Standard Life, said: “The UK pensions system is at a critical juncture. While auto enrolment has transformed participation, too many people remain at risk of falling short in retirement.
“The next phase must focus on how reforms are implemented in practice, ensuring that pension savings are translated into better outcomes through greater scale and a stronger emphasis on long-term value.
“Getting this right is essential to improving financial security in retirement while also ensuring pensions can support long-term investment in the UK economy.”
Joe Ahern, director of policy at WPI Economics, added: “Our analysis shows that greater scale and more diversified investment strategies, particularly increased exposure to private markets, can deliver higher returns for savers while supporting infrastructure, businesses and economic growth.
“The evidence points to a significant opportunity to improve outcomes but realising this will require coordinated action across the market and a regulatory framework focused on delivering higher net value for members.”
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