Part 1. Structure, diversity and scalability
We believe that adding private market investments to a portfolio could add long-term value to a pension fund. For many years, this advantage was primarily the preserve of Defined Benefit (DB) schemes, rather than Defined Contribution (DC) investments. The challenge was how to offer these investments to DC savers. We spent a number of years carefully evaluating the options available for DC arrangements, and in July 2024, we launched our Private Markets Access Fund (PMAF).
Prior to our fund launch, the development of the Long-Term Asset Fund (LTAF), which as a permitted link allows pension schemes to access private markets through a life insurance platform, heralded the start of a new era in DC, as private market assets became more widely available in DC world. However, while the LTAF removed some of the constraints for DC schemes to invest into this asset class, it didn't remove them all. Questions of pricing, dealing, taxation, time to market, diversification and scalability remain, unless care is taken with the way that we access this multi-faceted asset class.
These were all questions we considered when building the PMAF. Leveraging this experience, and our knowledge as a market-leading DC provider[1], we have prepared a ‘DC Buyers' guide for Private Markets'. The aim is to help schemes navigate provider selection for private markets investments. In this first instalment, we discuss structure, diversity and scalability.
Introduction
There are many things to consider when selecting a private markets fund for a DC scheme. In the second part of this guide we will discuss pricing, the appropriateness of a fund for DC schemes and how leverage can be used in these solutions. First though, we will examine the importance of the fund structure. Essentially, there are three key questions to ask when selecting a provider.
1. What is the structure of the private markets fund? Is it set up in a way that is beneficial for DC schemes?
2. How diversified[2] is the offering? One of the benefits of private markets is not just the illiquidity premium, but the fact that they can add further diversification to a portfolio. It's therefore sensible to ask whether a provider is offering access to different areas within private markets – for example private equity, real estate, private credit, infrastructure – providing a multi-asset approach that doesn't rely on one concentrated asset area.
3. How quickly is the investors' money going to get into private markets?
Below, we explain the solutions that we found to these questions and how we set up the L&G Private Markets Access Fund (PMAF) specifically to provide an option for DC schemes.
1. Structure
Liquidity
Because of the specific liquidity requirements of DC schemes, the structure of the fund is crucial. DC schemes have continuous ebbs and flows of capital, so as well as the operational need for daily valuations, they require daily dealing with the efficient use of liquidity key to this.
This can sometimes be problematic in a stand-alone LTAF. To fund standard daily liquidity demands, the investment manager may have to consider disposal of assets. Or they may simply hold a large allocation of liquidity/cash within the fund, resulting in investors' money potentially not working as hard as it could.
We addressed this by offering an investment-focused solution providing total portfolio management within a unit-linked insurance fund (or life fund), which offers daily dealing. Our LTAF sits inside the life fund as do complementary public market investments. These easily-traded assets enable us to maximise the allocation to illiquids by satisfying daily dealing requirements, while not having to hold large quantities of cash or make a forced sale of private market assets.
Taxation
Having an LTAF within an insurance fund is only one part of the solution. A key decision lies in choosing between an LTAF set up as an Authorised Contractual Scheme (ACS) or an Open-Ended Investment Company (OEIC), as each has distinct tax implications. An ACS benefits from a 0% withholding tax rate for UK pension investors, compared to the typical 15% rate for UK investors under the UK-US Double Taxation Treaty, and avoids corporate tax due to its partnership structure. In contrast, an OEIC would still be subject to this 15% minimum withholding tax on US dividends. Additionally, an OEIC incurs a 20% corporate tax rate on non-dividend income, including fixed income and property investments, which can significantly impact a multi-asset portfolio[3]. For DC schemes, ensuring the LTAF is structured as an ACS can enhance tax efficiency and minimize unnecessary tax drag on investments.
The PMAF LTAF is structured as an ACS, which we believe is the most tax efficient way for DC investors.
Figure 1. The structure of the unit-linked L&G Private Markets Access Fund
2. Diversification
As mentioned above, we believe that diversification is one of the benefits of private market investing. The way we have set up PMAF as a fund of funds means we have given investors access to a range of assets, rather than, for example, focusing solely on private equity. Examples would include investing in build to rent developments in Cardiff, Glasgow, Leeds, Bristol and London. We also invest in university spin out projects, such as companies specialising in protection against cybersecurity threats, windfarms in Finland and France and Solar Power and storage/renewable energy projects providing clean power for Ireland and Spain. So, by using our proprietary fund offerings, along with strategic partners' experience and reach, as shown in Figure 2, below, we are offering a multi-asset product. This ensures diversification, along with other benefits in terms of quality of investment held and scalability.
Fig 2. Combining internal and external management skills to create a well-diversified fund
It should be noted that diversification is no guarantee against a loss in a declining market.
3. Scalability
The momentum behind DC's move into private markets has been strong, and with this being relatively new to DC world, it can be tempting for providers to dive into direct investments. While we may consider investing directly in the future, there can be challenges with doing this from a standing start. One consideration is that by the nature of the investments, there can be a long gap between cash allocation and returns. After all, if we invest in a big infrastructure project at its inception, we are going to wait a long time to start realising our returns. Added to this, investing in large, illiquid projects can take a lot of time, leading to the concern over capital not getting to work quickly enough. Finally, the assets required to invest in some large projects could use up a lot of the available capital, leaving us with fewer eggs in our basket, meaning they aren't diversified enough.
Having been private market investors for over forty years, we decided to take a pragmatic approach. Our structure has enabled us to scale the private markets exposure effectively by utilising open-ended funds. This prevents persistent cash drag as inflows are received and enable us to gain private market exposure at a quicker pace. As illustrated above in Figure 2, we invested across multiple areas, giving exposure to existing as well as new assets.
Conclusion and next instalment
Our deep dive into structure, diversity, and scalability demonstrates how carefully designed private market solutions can unlock long-term value for DC schemes. By addressing liquidity demands, optimising tax treatment, and ensuring a diversified asset mix, DC providers can overcome traditional barriers and offer investors access to private market opportunities.
While developments like the LTAF have paved the way, the journey is not complete. In our next instalment, we tackle pricing—one of the most frequently asked questions—and explain why investing in quality and proven investments over cheaper alternatives is key to investor outcomes.
Authors:
Martin Dietz, Head of Diversified Strategies, L&G and Jayesh Patel, Head of UK DC Distribution, L&G
[1] Largest by AUM. Broadridge, UK Defined Contribution and Retirement Income report 2021. 2021 UK DC Assets: £515 billion AUM. Also 5.5 million members making us the largest by number of members L&G Annual Report March 2025
[2] It should be noted that diversification is no guarantee against a loss in a declining market.
[3] The OEIC does have certain deductions available to it and there is a carve-out for funds with >60% in fixed income instruments. We believe however, that structuring as an ACT provides a better solution overall.
Key risks
The above information does not constitute as advice.
The value of an investment and any income taken from it is not guaranteed and can go down as well as up, and the investor may get back less than the original amount invested. Past performance is not a guide to future performance.
It should be noted that diversification is no guarantee against a loss in a declining market.
Risk management cannot fully eliminate the risk of investment loss.
Reference to a particular security is on a historic basis and does not mean that the security is currently held or will be held within an L&G portfolio. The above information does not constitute a recommendation to buy or sell any security.
Tax treatment is based on individual circumstances and is subject to change.
The risks associated with each fund or investment strategy should be read and understood before making any investment decisions. Further information on the risks of investing is available from L&G's Fund Centres.
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