While pension schemes are increasingly aligning with the UK government’s desire for greater investment in domestic productive assets, it may take several years for data to show results, according to the Pensions Policy Institute (PPI).
In the recent years both previous and current UK governments announced a number of measures aimed at driving growth in the domestic economy, most recently launching the Mansion House Accord, which saw some of the largest UK defined contribution (DC) schemes commit to, on voluntary basis, achieve a minimum 10% allocation to private markets across all main default funds in their DC schemes by 2030, with at least 5% of the total going to UK private markets.
However, according to the PPI’s latest report – Pension scheme assets – how they are invested and how and why they change over time? – it may take several years for data to reveal a significant shift.
The PPI said this is due to several reasons. Firstly, it pointed out that shifts in strategy do not tend to be executed quickly in order to minimise transaction costs, adding that a rapid shift to private markets with high up-front costs could lead to accentuated fears of intergenerational unfairness in DC arrangements.
It added that a rapid flood of money transferring to private markets would have a negative impact on returns, and while master trusts and providers signed up to Mansion House initiatives, the allocations committed reflect only their growth accumulation funds.
It explained that as pension funds begin to mature, the later stages of accumulation and decumulation become a more important part of the assets, and private markets are unlikely to feature in those parts of the portfolio.
The PPI said that if government policy reforms have their desired effect, data should start to reveal higher allocations to private markets and to UK assets, particularly among DC schemes and providers.
For now, it expects Local Government Pension Schemes (LGPS), based on their stated intentions, to invest more heavily in infrastructure, particularly renewable energy, and other private markets, mainly at the expense of listed equities. It said that local or regional social impact investments may also attract more investment if suitable opportunities that meet return targets are made available.
DC schemes are expected to increase their allocation within growth default funds to private markets, particularly private equity.
For defined benefit (DB) pension funds, based on their strong funding position, PPI expects the focus will be on end-game planning, with buyouts being the preferred option for most.
The PPI said this will see a transfer of assets to annuity providers, which will result in a shift away from government bonds to corporate bonds, infrastructure, commercial real estate and lifetime mortgages.
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