David Will: The long-term investment horizon that’s typical of private market assets aligns well with the long-term nature of DC pensions
The latest of the Society of Pension Professionals’ (SPP’s) regular columns asks whether UK productive assets offer a compelling case for enhancing workplace pension members’ retirement outcomes.
There is no universally accepted or legal definition of productive assets, but most definitions share common elements. The SPP's 2024 paper Solving the UK Investment Puzzle defined productive finance as investments that enhance the UK's productive capacity, stimulate economic growth, and make a tangible, positive contribution to UK society. Examples could include infrastructure projects, renewable energy or research & development. These investments typically focus on long-term, less liquid assets – primarily in private markets.
Opening up private markets
Historically challenging for workplace savers to access, private markets have more recently been opened up as part of the government's push to boost productive asset investment. Launched in 2023, the Mansion House Compact created a voluntary expression of intent to invest at least 5% of default funds' assets in private markets by 2030. Long-Term Asset Funds (LTAFs) were initially created to provide defined contribution (DC) pension scheme providers easier access to long-term and less liquid assets, before being adapted for the retail market too.
Opportunities for investors
If sourced and managed appropriately, private market investing could indeed provide benefits for workplace pension members – through the opportunity to access a wider universe of assets. The prospect of enhanced returns, as well as real assets that offer inflation-linked and sustainable characteristics will help increase portfolio diversification to improve risk adjusted returns. Meanwhile, the long-term investment horizon that's typical of private market assets aligns well with the long-term nature of DC pensions.
Challenges
Private markets bear both liquidity and valuation risk. Recent headlines highlight large institutional investors attempting to exit private equity funds amid April's tariff-related global markets turmoil. However, these exits may present opportunities for those still seeking to allocate to private equity – by doing so through the secondary market at a discount, potentially yielding attractive returns.
Private assets can also come with less disclosure and regulatory oversight than listed assets, which could hamper investor due diligence on investment opportunities and holdings. The cost of private markets remains a significant challenge, despite government initiatives to help overcome this, such as changes to the charge cap rule to exclude performance fees and a shift in focus from cost to value.
Engaging for change
As outlined above, there certainly is a case to be made for the long-term potential of private assets within workplace pension portfolios. But careful implementation is key. Indeed, a recent SPP member survey revealed that 72% believe that "working with policymakers to identify and overcome barriers to investing in productive finance" is either a "priority" or "top priority", indicating that there is a substantial appetite to collaborate to create a more conducive environment for investment here.
The SPP's paper Solving the UK Investment Puzzle provides a more in-depth analysis of the specific challenges in ensuring UK pension schemes invest more in their domestic market, and explores options to address these challenges.
David Will is a member of the Society of Pension Professionals (SPP) investment committee
