The evolution of DC investments

The roundtable – chaired by PP editor Jonathan Stapleton and held in association with Columbia Threadneedle Investments – focussed particularly on DC investment in private markets, looking at how this has evolved since the Mansion House Compact and discussing the types of asset classes and vehicles trustees are looking at in order to get exposure.

Panellists also discussed how a VfM framework could impact investment strategy; how could consolidation impact the DC market; and what might the DC market of the early 2030s look like.

In light of Mansion House, several DC providers and schemes have now set out their approach to increasing allocations to private markets. What trends are you seeing?

Jess Williams (Phoenix Corporate Investment Services): Clients are utilising LTAFs via platforms or through private market allocation in investment trusts but a ‘watch and see' attitude still remains until the outcome of the next compact. As schemes invest in private markets, there is concern about the future and possible moves to master trusts and how to exit from assets that are fairly illiquid in the next two to three years. This uncertainty has delayed clients looking at private assets.

Jonathan Parker (Redington): The top ten master trusts' allocations to private markets look very different. That reflects that the private market space is very idiosyncratic. It encompasses private equity, private debt, infrastructure equity, infrastructure debt and real estate.

At present, there are no clear trends in fund types or allocations. Different master trusts are using different approaches, some use open evergreen structures, whereas some use closed. Some are happy to pay performance fees, some are not.

Rona Train (Hymans Robertson): Some single trust schemes are also taking a ‘wait and see' approach because of the timescales of them potentially moving to master trusts and because the some of the structures are relatively new. Delaying entry by two years is unlikely to significantly impact long-term member outcomes, but it offers a chance to learn from successes and mistakes.

Suzanne Rose (Mercer): One large client with a long-standing appetite for private markets recently agreed to a 30% allocation in private markets, so well ahead of the new compact. That client wants to retain the single trust structure, is invested for the long term and therefore is making that allocation. They have done a different allocation across the various stages of the savings journey.

We considered signing the new compact because we were early signatories to the original compact and supportive of private market investment in DC. For us, the key issue is the UK-specific allocation. As a global investor, we debated if this fits fiduciary duty but see no conflict. Investing in local communities and the UK economy is positive, the main question is whether enough opportunities exist.

We're developing a bespoke LTAF aiming for a 10-15% private markets allocation by 2030, to be used across Mercer and Now:Pensions. Now:Pensions will also invest directly in private markets.

James Lawrence (Smart Pension): We've had private markets for three years, starting at 6% and increasing to 15%. We've selected managers and built structures, avoiding LTAFs by using conditional permitted links. This covers private equity, infrastructure and existing private debt holdings.

We are pretty comfortable with signing up to the new accord because the UK allocation we will have will be 15%, so roughly a third will be in the UK, so we should hit the accord.

We are pretty bullish on private markets but you need to reduce costs, find the right platform, structure performance fees and get consultants and trustees on board, so there's lots of groundwork to do first.

Sukhdeep Randhawa (Isio): Our research shows property, infrastructure and private equity are the most popular private market exposures. There are lower allocations to private credit mainly as expected returns are lower due to where it sits in the capital structure. We are also observing interest in allocating to natural capital as a means to integrating sustainability and ESG beliefs into portfolios.

Originally, master trusts allocated under 10% to private markets due to commercial pressures and with one provider opting to invest 5% into private equity only. Now, with growing government and regulatory focus along with the increase in discussions in this space, allocations are rising to 10–15% and some with up to 30%.

On the single employer trust side, private market allocations depend on governance budget and operational factors such as platform provider capabilities and overall comfort levels of investing in these assets. Some were ahead of the curve and have been invested in private markets for a little while, but generally we are seeing target allocations of around 10–15%, across varying assets.

Joanne Fairbairn (Zedra Governance): Since Mansion House first emerged 18 months ago, trustee knowledge of private markets has grown. They're ensuring fiduciary duties are met and evaluating if LTAFs suit their needs. There's been a lot of upskilling around how they operate, but we also need to consider the future governance structure. How will we oversee the LTAF, ensure the investments are appropriate, valuations are accurate and costs are understood? As a trustee, I have governance questions but generally accept that private market allocations benefit members. The focus now is on making it work long term.

Andrew Brown (Columbia Threadneedle Investments): We've discussed private markets in DC for a long time and it is pleasing to see investment strategies sophisticate, enabling members to benefit from real asset exposures. Whilst private markets have outperformed public markets over long periods, members have missed out on the illiquidity premiums, however it is not just about ‘boosting returns'. DC schemes are heavily exposed to public equities in particular so introducing non-correlated returns can reduce portfolio volatility and enhance risk-adjusted perfromance.

Jonathan mentioned the idiosyncratic nature of client preferences within private markets and that has also been our perception. We're seeing a range of structure requirements from closed-ended, open-ended, and a mixed reaction to LTAFs. As an active-only manager, this is a great opportunity to engage with DC schemes and offer investment solutions that have traditionally been the preserve of defined benefit (DB) pension schemes, Insurers and Sovereign Wealth Funds. With a focus on UK real estate, we can offer opportunities across the spectrum of commercial, residential and climate transition projects for those clients that do not require daily liquidity.

Are there still roadblocks to private markets in DC, and is asset valuation within these structures becoming a concern?

Jonathan Parker: Roadblocks still exist, depending on the investment structure. Custodians are used to dealing with various investment structures and liquidity profiles. There will be hurdles, but they are easier to overcome if you have set yourself up like Smart, Nest or People's Pension..

Trustees and providers must think about what might happen if there is a big inflow or outflow and how that is managed in the context of the wider default strategy. They also need to handle performance fees fairly for members.

Life company platforms have solved many of the hurdles that existed five years ago or will have a conversation about how to solve them for a particular client.

Jess Williams: Exactly – it is about having the operational flexibility to include non-daily dealt funds by working with managers on what they can provide and when. The main issue with LTAFs for a platform is notification periods, so we work with trustees to help them understand the pre-notification and trade process.

We've also addressed challenges like exit terms, long-term inflows, prioritisation models and fair treatment of performance fees to ensure members aren't unfairly impacted by timing.

How do you ensure the costs equal out across private markets and the rest of a portfolio?

James Lawrence: We take a ‘barbell' approach: cheap on one side, expensive on the other. On the cheap side, we have synthetic equities. We use a total return swap to get the same passive equity exposure with the same voting rights, but that gives us effectively a zero-cost passive exposure. We also built our own technology 10 years ago, so we're the UK's lowest cost per member provider. It is about chipping away at costs wherever you can across the whole portfolio.

Suzanne Rose: Those actions are necessary to control costs, but members must accept that costs will rise because the best investable opportunities aren't as cheap as what we have invested in to date.

Looking at overseas markets, they are working with a larger fee budget but producing returns as a result. That shift will require a different mindset with less cost pressure.

Joanne Fairbairn: Cost has always been key when employers choose a master trust because benefit consultants have focused on cost. Government providers want to move from cost to value for money, but there is a reality gap, where cost is still king.

Allocating 5-10% to private markets only increases costs slightly, but even a 10 basis point increase is a challenge as employers and consultants focus heavily on costs when recommending providers.

I'm concerned about the proposed value for money test and its impact on private markets. Schemes will be compared against peers, but private investments go through phases. With early ‘j curve' losses and later gains, will this discourage schemes from investing in them?

Rona Train: I agree about value for money. The focus on backward-looking performance may deter some schemes from increasing private market investments. We've raised this with regulators, as forward-looking metrics are needed to encourage more private market exposure

Jess Williams: It will be harder for multi-employer DC trusts because competition focuses on cost. How do we marry up the allocation of value yet be driven by cost?

Andrew Brown: The low-cost mindset is a concern with private market access because top tier funds can become capacity constrained and they'll retain pricing power. The DC market does not want the cheapest, most available private market assets – the most in demand opportunities are often oversubscribed and can charge a premium. DC providers will have to strike a balance that ensures members are receiving good value and capitalise on their positive cashflows and long-term investment horizons.

How could the value for money (VfM) framework impact DC investment strategy?

Suzanne Rose: There is a danger the framework could constrain investment strategies to avoid a red or amber rating. There is also the danger of herding and missed opportunities because we are trying to move quickly rather than drive the best long‑term returns for members.

It should help create a shift from cost assessment to value, but there needs to be some drivers around how the framework is used by advisors and professionals, or it risks becoming a tickbox exercise.

Rona Train: The CAPS performance survey resulted in herding because nobody wanted to be in the bottom quartile and potentially lose business. We have a similar situation with the VfM framework. If you are towards the bottom of performance tables, you are potentially going to have to consolidate. That could lead to herding and discourage long-term opportunities for fear of short-term underperformance.

Andrew Brown: As a concept, the VfM framework is appropriate because the dispersion of returns, particularly among master trusts' default funds, is too wide. Furthermore, cost alone is a poor proxy for quality so it is important to focus on the net benefit to members.

There will inevitably be some herding, though policymakers are perhaps more concerned about members in underperforming strategies. We will likely see fewer outliers whether it be outperformance or underperformance, so whilst members remain somewhat protected on the downside it is important that innovation is not stifled or strategies become too conservative.

How could consolidation impact the DC market, and specifically investments?

Jonathan Parker: Consolidation could create focused, systemic risks that have not been fully thought through yet. Many of the top master trusts and contract-based providers rely on similar admin platforms, and the Financial Conduct Authority (FCA) is already scrutinising concentration in this area. A major cyber event could have serious consequences. While The Pensions Regulator (TPR) plans to apply stricter, prudential-style regulation to the largest master trusts, it will need to learn from other financial regulators, life FCA and Prudential Regulation Authority (PRA), about how to manage this change effectively.

Rona Train: Single trusts will face increasing pressure to prove why they should remain as a single trust scheme. We've developed a forward-looking market benchmarking that allows single trust schemes to compare the projected outcomes of their investment strategies against master trusts. This provides an independent check on their investment strategy and provides tangible input to their value for money assessment. That forward-looking assessment is what's missing currently from the VfM proposals but is what is needed.

Andrew Brown: Master trust authorisation focussed primarily on certain minimum standards and left investment strategy quality to ongoing supervision and evolving regulatory frameworks. . Market forces, commercial realities and competition based on investment returns (among other factors) could prompt further consolidation, but the government seems keen on mandatory pathways.

However, all master trusts at similar bulky sizes is not ideal for accessing suitable investment opportunities. Different sized asset owners would target different pools and a greater variety of assets. If they are all £50 billion, quality of opportunities may decline if capital exceeds what the market can absorb.

Suzanne Rose: A lot of what we've talked about would crystallise if mandation happens. If the market is functioning effectively and there are investable opportunities, schemes will make those investments – they already do. There is enough scale already to do that.

If they do not, it is because the trustees do not feel it meets their fiduciary duty. If the government pushes mandation too fast, we risk investing in lower-quality assets, creating systemic risks by crowding into the same opportunities or overpaying for scale.

Andrew Brown: The government wants more UK investment and sees large-scale consolidation as the route. But fiduciary duty relates to members, not the UK or broader society, so justifying UK investment on that basis is tricky. Is the government going to get what it wants? If not, will it do something about it?

Joanne Fairbairn: The government will get what it wants if it creates an environment where UK-based startups and entrepreneurs thrive. If that happens, investments from overseas or UK pensions will flow into the UK because that is where the best returns lie.

Mandation is a poor way to force investment. If trustees are mandated to invest locally when better overseas options exist it puts pension schemes in a bad position.

What might the DC market of the early 2030s look like?

Sukhdeep Randhawa: With the drive towards consolidation, I can see a market where the majority of DC assets are concentrated in five to ten master trusts, but some large trusts that are able to make use of DB surpluses or have sophisticated in-house investment teams and governance, remain as they are.

As 25% of the global population follow Islam, and the working population following this faith is increasing, there'll be a need for more inclusive pension options such as sharia-compliant, beyond self-select funds.

Technology, AI and advancement in operational issues will impact pensions in different ways and will improve access to a wider range of investments, especially in private markets.

James Lawrence: We'll be a few rounds into value for money, likely with some tweaks along the way. We might see a consolidated regulator and some fallout from that.

There will be bigger in-house teams, moving towards custodian or hybrid type models with more direct investment. It will probably shift towards the Australian retail approach of DC.

Suzanne Rose: Providers are committed to the new accord's ambitions, but the government must help by supplying assets and creating the right market. Without full cooperation, we risk staying where we are.

Rona Train: We are seeing some new trust-based DC schemes being set up within existing DB trusts, with companies using the surplus to fund DC contributions. How the regulator responds will be important. We still think mandated scale is likely as the government pushes for more UK investment. CDC, particularly for decumulation, will become another option as more people retire without DB

Jonathan Parker: It will be fascinating to see if there will be a geographic rebalancing away from the US amid geopolitical tensions.

Private market allocations may reach 25-30%, with overall fees rising to 30-40 basis points (bps) from today's 20-30bps There's less pushback now, and some employers are already accepting higher fees for a more sophisticated approach to investment.

Jess Williams: It will be interesting to see if current moves on consolidation and dashboards increase engagement and make pensions part of people's overall savings. Dashboards should highlight the gaps in savings. This transparency will challenge the government on how they support and commit to mandation.

Joanne Fairbairn: Decumulation is a key focus. Over the next five years, we hope to see better products, ie more than just drawdown and annuities, and more personalised guidance at retirement, supported by digital tools. But contribution adequacy will likely remain an unresolved issue.

Andrew Brown: The DC market could look fundamentally different with greater concentration, sophistication and a focus on outcomes. We will see solutions for retirement income and perhaps some public scrutiny of retirement adequacy. There's also potentially room for a ‘tech-based' disruptor in the market, perhaps a brand that can more readily engage and understand their members.

This roundtable was held on 7 May 2025 in association with Columbia Threadneedle Investments