Defined contribution (DC) schemes that invest in private market assets could generate a higher retirement income for members, a report claims.
Research by Partners Group found DC funds that make even a modest allocation to private equity, debt, infrastructure or property could generate 15% more monthly income in retirement than a standard fund. It is also believed that such a strategy could reduce volatility in the portfolio.
This is based on Partners comparing the performance of a typical 60% public equity and 40% bond fund with a hypothetical portfolio that includes 16% allocation to private market assets since 1975.
Partners Group managing director and head of portfolio and mandate solutions, Roberto Cagnati, said that there is no ‘one-size-fits-all’ approach to including private market assets in DC pension plans.
“However, our paper amply demonstrates the potential positive benefits of including an allocation to private markets within a DC pension portfolio, not only on retirement outcomes, but also in terms of reducing the volatility of a long-term investment portfolio and mitigating the number one risk of DC pension investing, which is that return targets are missed altogether and retirement outcomes are insufficient,” Cagnati added.
Partners’ senior vice president and global head of consultant relations, Joanna Asfour, said studies have shown that DC schemes are lagging defined benefit (DB) plans in terms of performance.
“We believe that the relative underweight to private markets in DC plans is a significant factor in this performance lag – a theory that this paper supports,” she added.
Asfour pointed out that now the operational hurdles stopping private market managers from developing funds for DC schemes have been overcome, she expects private assets to play a role in the shaping of DC pension outcomes in the future.
