The role of UK real estate in DC pensions

The roundtable – chaired by PP editor Jonathan Stapleton and held in association with Columbia Threadneedle Investments – also looked at the investment case for including real estate in private market portfolios and assessed the outlook for investment returns in property going forward.

How are DC schemes currently approaching private markets?

Jo Sharples (Aon): With caution. Private assets are illiquid and if you get it wrong, it is quite hard to unpick. Our default is already equity-heavy, so any additions need to work hard. For younger members, it is about private equity, real estate and infrastructure; while for people closer to retirement it is more about private credit but shorter maturity. We're aiming for balance and using open architecture to select best-of-breed funds and target specific exposures.

Sarah Lochlund (Barnett Waddingham): There is an enormous amount of pressure on schemes to go into private markets and the cogs are turning, even if investments have not yet been made. Our survey looking at own-trust schemes found that there are only four of over £500m in size that have an allocation of over 5% to private markets, which gives you a flavour of what they are doing. But we shouldn't criticise them for this – they should approach it with caution.

In terms of what to include portfolios, if you are looking to boost returns, then private equity must be a cornerstone of that. There are, however, a lot of red flags in the private equity space, and liquidity remains a concern.

Mark, what's your view from a trustee perspective?

Mark Thompson (independent trustee): Cautiously optimistic! Most providers have signed up to the Mansion House Accord but only a limited number of own-trust schemes.

The whole industry is moving in the private markets direction, but it is right to be sceptical and you need to ask is this good for the member and what returns are we going to get? If everyone is trying to buy the same thing at the same time, it is not going to be good.

Overall, however, it will eventually become what we do but, in terms of driving this forward, I think it will be the big master trusts and the big contract-based players that will be the ones that make a difference in this space.

Kinna Patel (NatWest Cushon): I agree – it is different for master trusts and I think own trust schemes do need to be more cautious. From the master trust perspective, we seeded one of the first long-term asset funds (LTAFs). But careful due diligence needs to be done on the managers you select, because, within the various different asset classes within private markets, the range of returns can be significant – as such, focusing on the manager that you are selecting and partnering with them is something that is important.

How are you approaching this from a regulatory perspective?

Jenny Paul (The Pensions Regulator): From a regulatory perspective, we support private markets as part of a diversified portfolio. It is another tool for trustees to consider when setting investment strategy and can deliver growth and improved outcomes for members.

But schemes need to approach private markets with caution because we know it is difficult – it needs the right governance, oversight and advice on some of the more technical implementation issues. Real estate has had issues in the past, with valuations, redemptions and fund gating. Those are the sorts of issues that need to be thought about and worked through.

What is the investment case for including real estate in DC portfolios?

Guy Glover (Columbia Threadneedle Investments): Real estate is often considered to be the ‘original' private market's allocation within pensions. The investment case for it goes back to the fundamentals and what it offers members – it delivers a strong income return, rental growth delivering some inflation protection and capital growth over the longer term. It also provides strong diversification – we all appreciate the growth of equities, but they are volatile. Including a low correlated asset class to reduce volatility provides members with a different style of return is important because it help them build trust in the stability of their pension pot providing confidence to save in differing markets. Using real estate, we can remove some of that volatility and deliver greater long-term returns. In terms of market timing the sector offers a really interesting entry point with future returns looking relatively strong post the recent pricing correction.

There are wider aspects as well. Property is also a tangible asset – real estate is all around us on a daily basis. It is part of the fabric of society and therefore also provides some wider benefits in terms of regeneration, sustainability and assisting with the route to net zero. Beyond the Mansion House Accord, real estate is also becoming more and more aligned with wider government policy and combined is likely to result in additional capital flowing into to real estate providing investment return tailwinds.

Andrew Brown (Columbia Threadneedle Investments): The traditional approach to UK real estate investment in DC defaults has been made relative to an all-balanced‑index approach, a fairly diversified sector and regional allocation that is mindful of the peer group benchmark. As the DC market sophisticates, various approaches to the asset class will likely emerge; we may well see portfolios designed to meet specific risk-return profiles, tailored or perhaps opportunistic.

How can real estate debt help or complement real estate equity?

Kristina Foster (Future Growth Capital): We can generate more attractive returns than those typically available from traditional fixed income investments – and, in our strategy, we are targeting returns of 8-9% p.a. Our strategy is also secured by underlying real estate and benefits from an equity cushion, and priority ranking on credit default. Real estate debt also provides regular cash flows. Added to this, we do not own the asset so we don't have the operational complications or risks from direct ownership, although we do originate and structure transactions in-house so have a direct relationship with the equity owner and can control the structure of loans.

Ultimately, while we perhaps are not getting the same level of returns as those investing in real estate equity directly, we are still getting very good returns for what is a better protected position.

Is cost still an issue when it comes to private markets?

Jenny Paul: Cost has often been discussed as one of the barriers for private markets but it is good to see the discussion is moving away from the focus on being as cheap as possible into a broader discussion around value for money.

Jo Sharples: I do still think cost is a bit of an issue in the industry - it has moved on from a lowest cost is best approach, but there is a massive challenge as to how we disclose costs. And we are starting to see quite complex fee structures pop up and there is a danger we lose some of the hard-earned transparency we have. We probably need to think about that as an industry so we do not take one step forward and two steps backwards.

Mark Thompson: I agree. We need complete transparency of what the costs are. But private markets will cost more.

Kinna Patel: Cost also drives the allocation you are willing to put into your default to some extent – higher allocations may not be feasible on a cost basis.

If I buy a share, all the costs of managing the company are embedded into the share price. If I buy a building or other private asset, most of the costs of managing that asset are put onto my fee. Is this issue?

Jo Sharples: Yes and we have been looking at fee layers in general – it is super complicated and there isn't always a brilliant understanding of what the costs are. From our perspective, many of the costs will be passed through to third-party managers so it is about trying to think about how to bucket, market and disclose them.

Chair statements don't accommodate these costs well, and the charge cap creates distortions, meaning people will try and get more fees into certain buckets that will work. The point is that you have that uneven playing field before you start.

Sarah Lochlund: Member fairness in private markets is complicated due to uneven cost allocation and performance fees. These challenges deter people from going into private markets, especially with large, lumpy assets. While fee structures are evolving, cultural shifts around fairness are slow.

Mark Thompson: That gets worse when you think about performance fees as well.

Sarah Lochlund: Yes, it does. It gets difficult when you think about performance related fees, because who has benefited from those performance fees and who is having to pay them? Often, those are not the same people and that does not feel fair.

Andrew Brown: As an investment manager, we haven't yet seen a turning point from cost to value. With value-for-money framework assessments coming in 2028, tenders remain heavily weighted towards cost. Given the capacity constraints in high demand private markets, DC investors may well miss out on the best opportunities that can sometimes become oversubscribed.

Many argue that DC investment charges should be higher to allow broader opportunities, but employers have resisted. Is the regulator aware of that issue, and how do we focus on value rather than cost?

Jenny Paul: Yes, we're aware. The master trust market is competitive and employer selection exercises have driven down costs. Some see the charge cap as a constraint, but we think there is room there. We hope the value-for-money framework will move the dial and hopefully help schemes and employers to consider broader value and not just focus on the cheapest solution.

Where do you see the key opportunities in real estate at the moment?

Guy Glover: We have had a challenging few years in real estate, but everything is cyclical and now is a great entry point, both on the debt side as well as on allocating equity to the market for future returns.

But we now build portfolios differently: by income type rather than sector, and focus on what each asset delivers. It is about how the sectors can deliver you either the high income, income and growth or capital plays and that can change. Something which may have given you high income may now be a capital play, for instance, and we very much bucket it like that.

Giving you an example of some of the things in our portfolios at the moment. I have just bought 300 acres of land in Bristol, which is a strategic land play to deliver biodiversity net gain (BNG), but also some additional housing over three or four years, which should give us a 2.5 times equity multiple.

And, while we tend not to talk about sectors anymore, let's take a look at a few. We have invested over a billion in retail warehousing over the last two or three years – it has a very low vacancy rate and there is the opportunity to get a solid income return as well as benefit from the rental growth coming through the sector. Industrial have been flavour of the month for the last 10 years – we are now cautious on parts of it and concerned around potential vacancies going forward.

Big box distribution centres around the UK, close to conurbations, also have a role to play. I have never been a big buyer of big boxes because they are very lumpy and you always have to ask what happens at the end when the occupier moves on. But it is the aligned income that we quite like.

There are also alternatives such as built to rent, healthcare and so-on, where you have those very strong demographics coming through, which will support the underlying business case of those assets.

For me, it is all about improving that net operating income over a period of time. Property is cyclical and the way you can remove some of that cyclicality is to hold assets where you can grow the income stream – if you can do that, you are increasing wealth for your underlying members.

Andrew Brown: The DC market is starting to move away from the all-balanced‑index approach to Property funds, which involves a diversified sector and regional allocation that is mindful of the peer group benchmark. As the DC market sophisticates, it will be pleasing to see DC investment strategies benefit from the types of portfolios that have been available to DB schemes, Local Government Pension Schemes, Sovereign Wealth Funds and family offices;less liquidity-constrained approaches that can be tailored or opportunistic and offer greater value for members.

Turning to structures – what's best for DC schemes to access private markets and real estate? Are LTAFs the answer?

Guy Glover: I support a regulated structure for LTAFs, but they are not the only solution. It goes back to what trustees want to do with it and what style of returns they want. Variety will hopefully allow further interesting ideas to come through.

Kinna Patel: LTAFs have built-in liquidity buffers, and contributions help balance inflows and outflows. They've opened the door for master trusts and DC schemes in illiquid asset classes. Now we will start to see different fund structures being explored, and more satellite allocations to more niche areas.

Sarah Lochlund: LTAFs could be a very good entry point for multi assets – helping manage the J-curve and liquidity. But there is a difference between LTAFs in theory and LTAFs in practice – they were a good idea to stop some of the rules that prevented people investing in private markets, but there is room for improvement from an LTAF product position.

Jenny Paul: The regulation of LTAFs falls within the remit of the Financial Conduct Authority so we do not get involved in the approval of them. Saying that, LTAFs have helped open conversations with platforms. Before LTAFs, getting private markets onto DC platforms was challenging. The fact that there have now been 34 approved means LTAFs are opening up that conversation.

As a regulator, however, we are more concerned with understanding the governance and the oversight of the product itself and considering liquidity factors as schemes grow and more members retire.

Is the UK a good home for real estate allocation?

Guy Glover: Yes. It is aligned with other ambitions and that 5% will help in terms of flows into UK real estate, which will help with our industrial strategy or housing strategy. All the aligned benefits mean that we should see a resurgence in flows. Domestic ownership of UK property has fallen to about 50%; more local investment would strengthen the economy and see better outcomes for all members.

Members benefit from growth in the UK economy. Part of what the government is trying to do is to get the UK economy growing, something that will ultimately make members richer themselves. This alignment of benefits mean that we should see a resurgence in domestic flows, which have been very low from UK domiciled capital. Additional flows from UK investors would be a good thing.

How is real estate driving real-world impacts in sustainability and regeneration?

Guy Glover: For me, it's an opportunity. As an example, we have installed solar panels on some of our assets, gaining additional return and cheaper energy for occupiers. Greener buildings boost yield and market value. It's not just about net zero: it's about regeneration and how we make a fairer, better society.

Another example is a Liverpool build-to-rent scheme we completed, which had strong community impact. These extra benefits matter. The real cost is not doing it, which leads to underperformance. Forward-thinking managers must deliver the right solutions for occupiers, which will feed through to the performance we can deliver to DC members.

Mark Thompson: Agreed. From a fiduciary view, you must get good returns while embedding ESG. You invested in a care home, and you got a 40% return. That's a great example of having a social impact. In DC, engagement is tough. Real-world examples that combine returns and impact are key. People like stories, and that gets engagement.

Kristina Foster: In real estate debt, lenders can promote positive behaviour through loan terms. Some of our borrowers can be encouraged to make improvements to things like EPC ratings, which will preserve exit values of the assets, while improving environmental efficiency.

What are your concluding comments?

Sarah Lochlund: The outlook for real estate is looking more positive than it has in recent years. Costs, performance fees and quality of holdings remain key across private markets – it is moving in the right direction but there are hurdles to clear and DC schemes are right not to rush.

Jenny Paul: It feels to me like we are at a turning point. DC is growing in terms of scale, and investment strategies are becoming more sophisticated. The Pensions Bill has so much in there as well. From our perspective, as demand and investment in private markets grow in the DC space, it is important to be cautious. It is important to do it well and have that member focus at the forefront of our minds.

Mark Thompson: The plumbing for DC schemes to be able to invest in private markets is now there. As we get more used to it over the next few years, there will be more and more DC investment in private markets. Real estate has an advantage because people are already investing in property in DC schemes so it is a known asset. What I am taking away from this roundtable, however, is the need to think about property maybe a bit differently, rather than just in terms of a balanced fund.

Jo Sharples: I remain cautious but these are very exciting times and there are some interesting opportunities. Looking ahead, I see this as a bit of a journey, with schemes starting to get this off the ground operationally before adding more interesting and more specialist areas going forward. What we have on day one will look very different in three, four or five years' time. It is very exciting.

Kristina Foster: Real estate debt should already be a part of the investor toolkit. It is a way to access real estate while having downside protection. It is a diversifier with good absolute, and especially risk adjusted returns. The opportunities exist across housing and asset regeneration and there's an opportunity to support the environmental characteristics of the built environment, which is key.

Kinna Patel: There are a lot of opportunities within real estate and it comes back to the point of how we utilise those different opportunities within the lifestyle – do we, for instance, have one particular type of property in the earlier years and one particular type of real estate in the later years? But there is opportunity, it is thinking about how best to utilise it.

Guy Glover: Property is cyclical but, at this point now, we should see some nice returns going forward. Real estate should be a long-term allocation for DC investors and the bedrock of a private markets portfolio.

Andrew Brown: The DC market does face challenges, notably relating to adequacy and coverage, compounded by demographic changes. This makes it even more important that to get the investment piece right – that is within our control right now.

With that in mind, real estate offers diversification and long-term value if integrated thoughtfully. Overall, it is good to see DC schemes' investment strategies innovating and seeking means to access the kind of opportunities other asset owners have been afforded over the years.

This roundtable was held on 30 September 2025 in association with Columbia Threadneedle Investments