SPP: Making the government push into private markets a success

The government has bold ambitions to channel more pensions money into private markets, hoping this could help to give the UK economy the boost it badly needs.

We are supportive because the opportunities are significant – both from the economic stimulus that greater investment into real estate, infrastructure and early-stage companies could bring, and the potential for enhanced returns and diversification for the pension pots of millions of people.  

But, of course, private markets work in a very different way to public ones. If we want this push into private markets to be a success, a public education campaign may be necessary. We have advocated for this around public markets for years and, on the private markets front, this kind of initiative could have big benefits not just for individual savers but for industry too.

A lack of financial literacy is a UK-wide problem and while the pensions industry is made up of highly intelligent, well-informed people, most people's knowledge is understandably based upon years of experience with public markets. It's up to all of us to get to grips with this "brave new world".

Because, first of all, this generic bucket of ‘private markets' is actually made up of several different asset classes, including private equity, venture capital, real estate, infrastructure and private credit – each of which has its own nuances, with big variations in risk level and expected reward. It's crucial that those of us making decisions about pensions understand those nuances.

Other factors

There are also additional factors pension professionals must consider when investing in private markets – most notably the J-curve effect. This is a phenomenon in which a period of unfavourable returns is followed by a period of gradual recovery that then rises to beyond the starting point. It is common in private markets because the initial investment, management fees and time needed to operationalise and mature investments drags down returns at the beginning.

If not mitigated by the pension fund or their asset manager, the J-curve can cause significant issues around intergenerational fairness, with individuals entering and exiting pension funds at different times.

Industry professionals will need to lean on their consultants, independent trustees and asset managers to provide necessary training to navigate these complexities. At Aberdeen, we supplement such training with tours of our assets to truly bring private markets to life, something that others could certainly replicate.

If it's going to be a challenge for industry to get to get grips with this "brave new world", it will likely be even more difficult when it comes to consumers. Particularly when various research has shown most people don't know what their pension is invested in.

The onus is on industry to pass on their knowledge to members in a clear and engaging way. Importantly, we need to communicate both the benefits and the risks of greater pension allocations to private markets.

Making these concepts relatable and tying them to everyday life is key to helping individuals to understand the direct impact they can have on them personally.

So yes, there is much hard work still to be done to ensure greater access to private markets within the UK's pensions industry, although we are heartened by some meaningful first steps. But there's also much to be gained for the pensions industry by doing so – whether that's supporting the possibility of better long-term returns for savers or even getting individuals more engaged with pensions by showing them how their savings are helping to fund new schools, hospitals, innovative companies and much, much more.

Mark McKelvey is a member of the Society of Pension Professional's investment committee and head of institutional clients UK at Aberdeen