Private markets could play a larger role in UK pension defaults over the next decade, according to Standard Life and WPI Economics.
A new report ‘From Scale to Impact: A Blueprint for the Future DC Pensions Market’ looks at how consolidation and pension reforms could reshape how default funds invest and sets out how larger schemes could build more diversified portfolios and increase exposure to private markets.
The research suggests that the UK workplace DC market could be dominated by 10 to 15 large pension schemes by 2035, each managing more than £50 billion in assets. Under this scenario, Standard Life said default funds could potentially allocate between 15% and 30% of assets to private markets during the growth phase of retirement saving – significantly above the 2% to 4% allocated today.
The report also anticipates growth in the range of private assets within defaults. Rather than concentrating exposure in a single asset class, the blueprint sets out a scenario in which funds can invest across a broad mix of private market assets. In this scenario, private equity and venture capital could account for 30% to 50% of private market allocations, private credit between 20% and 40% and infrastructure and real assets 20% to 40%.
According to the report, this mix could support more diversified portfolios and stronger long-term outcomes for savers by combining different levels of return and risk.
The report suggests private credit is likely to play an increasingly important role in helping schemes manage liquidity and downside risk. Infrastructure investments could provide long-term, inflation-linked cashflows and diversification benefits, while private equity and venture capital are expected to drive long-term growth and value creation.
Jenny Holt, product director at Standard Life, said: “Interest in private markets has grown significantly in recent years, but adoption across the workplace pensions market is developing at different speeds.
“This research explores how the DC market could evolve over the longer term if schemes continue to consolidate and gain greater scale. In that environment, larger schemes may be better placed to access a broader range of investment opportunities and build more diversified portfolios.”
The findings show that UK DC schemes could begin to mirror their international counterparts, such as Australian superannuation funds which currently invest around 17% of assets in private markets.
While maintaining global diversification, the report also argues that future schemes are likely to retain a “meaningful domestic bias” within their private market allocations, estimating that 30% to 50% of private market investments could be allocated to UK opportunities, compared with around 5% to 10% of listed equity investments.
By 2035, the report forecasts that between £40 billion and £200 billion of DC pension assets could be invested in UK private markets under this approach, compared with an estimated £2 billion to £3 billion invested in private markets by today’s master trusts.
Holt added: “Ultimately, the focus should not be on allocation targets alone, but on the value private market investments can deliver for members. Different schemes are likely to take different approaches as the market develops, but any investment strategy should remain focused on improving member outcomes, delivering value for money and being supported by strong governance and a clear investment rationale.”
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