Pension schemes face hurdles to private market investing
According to a recent report by The Pensions Regulator (TPR), pension schemes express interest in private market investments but face significant obstacles. These include unclear fee structures, governance complexities, knowledge deficiencies, regulatory ambiguities, and a lack of suitable investment options.
Obstacles to Private Market Expansion
TPR’s study, Market oversight: UK pension funds – private market investment, was based on consultations with over 40 industry participants, such as trustees, pension schemes, investment consultants, trade associations, and fund managers. The findings revealed that trustees and their advisors were receptive to UK private market opportunities that aligned with their schemes’ objectives regarding returns, risk management, diversification, cash flow, and liquidity.
A majority of large defined contribution (DC) schemes and master trusts had either already entered the private market space or planned to do so. Long-Term Asset Funds (LTAF) also served as an entry point for some schemes into this asset class. However, substantial allocations were less prevalent. Schemes venturing beyond real estate for the first time often opted for diversified funds encompassing private credit, infrastructure, property, and private equity.
Interest in venture capital, particularly UK-focused, was more restrained due to small investment sizes and the additional governance burden. When schemes did invest in this area, they tended to focus on later-stage or growth-oriented opportunities with reduced risk profiles.
Goals and Hurdles
Nonetheless, some schemes avoided specific UK allocation goals due to concerns about potential conflicts with trustees’ fiduciary responsibilities. Stakeholders also questioned the availability of sufficient UK opportunities that could compete with international investments in terms of returns and other key characteristics.
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The report emphasized the importance of a robust pipeline of high-quality, investable opportunities and appropriate fund structures to realize the goals of the Mansion House Accord. Fees were a persistent concern, especially performance-based charges, hidden additional costs, and uncertainty regarding the treatment of private market expenses within charge-cap limits. Some DC and master trust providers also expressed worries about potential cross-subsidization among different saver groups.
TPR identified knowledge gaps among trustees and a scarcity of private market specialists within the DC consulting sector. Private assets often required more advanced governance and risk management approaches compared to public market investments. Policy, political, and regulatory uncertainties, including future scale requirements, further deterred some schemes. Defined benefit (DB) schemes, on the other hand, showed limited interest.
Many DB schemes were well-funded and focused on reducing investment risk, while illiquid assets could limit their flexibility or expose them to penalties when transferring benefits to insurers. Pensions Minister Torsten Bell emphasized the significant investment potential of pensions for the UK. He stated, “This research moves us closer to understanding the barriers holding schemes back, helping us work with industry to unlock investment that supports a stronger economy and better retirements for savers.”
Ben Gunnee, TPR’s executive director of market oversight, commented: “Pension schemes want to invest in private markets, but many funds are currently experiencing practical barriers that limit their opportunity for investment. Our research can help government and industry understand what’s getting in the way and where action could unlock investment that benefits members and the wider economy.”
Guidance and Oversight
TPR advised trustees to prioritize member outcomes, scheme strategy, and risk profile, while considering their fund’s development over the next five to ten years. Trustee boards should evaluate their knowledge, experience, and capacity to assess and monitor private market investments, as well as review their investment advisers’ capabilities and objectives.
