DC pension funds to boost private market allocations by 2035
Defined contribution pension default funds could raise private market allocations from roughly 2 to 4 percent today to between 15 and 30 percent by 2035, according to a report by Standard Life and WPI Economics. The analysis, titled “From Scale to Impact: A Blueprint for the Future DC Pensions Market,” explores how pension reforms and market consolidation will alter default fund investment strategies.
Consolidation and Asset Allocation
The report projects that consolidation will create a market dominated by 10 to 15 schemes holding more than £50 billion in assets each. This scale enables default funds to expand private market allocations significantly. Future portfolios could include private equity and venture capital for 30 to 50 percent of assets, private credit for 20 to 40 percent, and infrastructure or real assets for 20 to 40 percent.
Diversified investment portfolios are expected to become more prevalent, leading to improved long-term results. According to Jenny Holt, product director at Standard Life, the growth of private markets has been uneven across the workplace pensions market, with larger schemes potentially having an advantage in terms of investment opportunities. Holt notes that these schemes may be better equipped to create diversified portfolios.
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International pension funds, such as those in Australia and Canada, are likely to serve as models for UK DC schemes. These funds combine the benefits of infrastructure investments, including diversification and protection from inflation, with the growth potential of private equity and venture capital. The report predicts that between 30 and 50 percent of private market investments will be made in the UK, compared to 5 to 10 percent of investments in listed equities.
By 2035, the amount of DC pension assets invested in UK private markets could increase to between £40 billion and £200 billion, up from the current estimate of £2 billion to £3 billion. Joe Ahern, director of policy at WPI Economics, states that the size of a pension scheme affects its investment capabilities. Ahern believes that larger schemes are more likely to have access to a wider range of investment opportunities and can create more diversified portfolios across various asset classes.
