It’s an exciting and challenging time for pension investment. There’s nothing short of a whirlwind of developments, consultations and regulations coming into play. The Chancellor’s Mansion House speech in July helpfully brought many of these together.
They include, among others, consultations (now closed) on how pension savers can best be supported at the point of access, a value for money framework, further rules around local government pension scheme (LGPS) investment and opportunities for more collective defined contribution (CDC) schemes to be developed.
Alongside this, the government is encouraging large defined contribution (DC) schemes to have at least 5% of their default funds allocated to private market equities by 2030.
And let’s not forget regulations compelling schemes to demonstrate that they are considering the potential financial impact of climate change and environmental, social and governance factors.
Unsurprisingly we are seeing significant development by government, pension schemes and their representatives.
For example, the development of long-term asset funds (LTAFs), which are designed to work on DC investment platforms in order to enable smaller schemes to access illiquid assets.
The National Employment Savings Trust (Nest) is leading the way for master trusts with 15% of its assets invested in illiquids in 2023, up from 10% in 2022; while the Productive Finance Group, which includes the PLSA, Association of British Insurers and the Investment Association, is working to help facilitate schemes to invest more into private markets, illiquid and alternative assets.
Despite these developments, regulatory intervention and innovation we have seen from government and industry, there is space for more collaboration between schemes of different types.
The development of UK schemes is varied, from defined benefit (DB) schemes that have been with us since the 1600s, to the newer contract-based DC schemes and master trusts. Soon CDC schemes will be added to this landscape. UK schemes of different types may operate in different markets, face different challenges and even fall under different regulation.
However, that doesn’t mean schemes can’t learn from the experience of others, and, during these challenging times, it may be useful for newer schemes to look to larger or more established schemes rather than reinventing the wheel.
In particular, it could be useful for DB and DC schemes to take a look at how LGPS schemes have approached investment in illiquids and private markets.
In 2022, LGPS schemes allocated around £10bn to illiquids, up 24% from 2021 as they sought inflation-linked and high returns. Private equity and debt form a significant part of these investments, though infrastructure is the most popular asset class.
These increases into alternative assets are motivated by a variety of factors, including government encouragement, the poor performance of listed assets and the advantages LGPS schemes gain from being invested in pooled funds.
While the unique pooling approach of LGPS makes some read across difficult for individual DC schemes, there are potential lessons on how best to use consolidation, DC asset pooling and the assets of larger schemes.
It may be helpful for DC scheme providers to speak to individual LGPS schemes and pool providers, to understand how to identify and access illiquid and private market assets, particularly with a focus on how to overcome barriers, conduct due diligence and negotiate pricing structures with third-party asset managers.
Private sector DB schemes also have a lot to offer, based on years of running pension schemes and responding to market and demographic changes.
While DC schemes clearly face different challenges around charging and a higher level of transfers in and out, there are still similarities between institutions whose main aim is to ensure that members and/or employees receive a decent income in retirement.
And as this is such a challenging time, with so much change afoot, it makes sense for schemes to leverage available knowledge as much as possible.
Daniela Silcock is head of policy research at the Pensions Policy Institute.
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