R E G U LAT ION
UK TO UNLOCK DEFINED CONTRIBUTION PENSIONS As defined benefit (DB) pensions phase out, concerns over liquidity and fees among DC pensions are being investigated by advisers and governments in the UK
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efined contribution (DC) pensions are set to become dominant investors in private market funds within the next two decades. UK investment consultants are leading the way in researching ways to access this largely untapped market, promising benefits for private equity fund managers globally. According to The Pensions Regulator, workplace DC assets in the UK were just over GBP500bn in 2021 and are expected to grow in value to GBP1 trillion by 2030. Some DC-based pension funds such as Nest (which recently committed GBP1.5bn to private equity) are targeting private equity in anticipation of greater opportunities and innovation. Fund managers including Schroders, Blackrock, and Partners Group have been linked to the investor segment in recent reports.
“Every investment consultancy specialising in DC will be researching this given its potential to improve retirement outcomes for members of DC schemes,” says Hugo Gravell, investment actuary, Barnett Waddingham.
Moving hurdles
DC schemes differ from other pension schemes as, unlike defined benefit schemes, they depend on how much an individual investor contributes to the pension, as well as on how well the investments perform. Due to the risks that are involved with DC schemes, pension holders have greater valuation and liquidity demands – characteristics traditional private equity funds are not usually known for. Conditions have been created by government intervention to support the requirement for more long-term investment in DC pension
funds, but high fees and illiquidity issues still represent hurdles. “Defined benefit is going to get supplanted by defined contribution plans,” says Andrew Brown, head of private equity research at Willis Towers Watson. “However, DC plans have charge caps and require daily liquidity and valuations, which doesn’t work well with the current private equity closed-fund model.” In June 2021, the UK government published ‘The future of the defined contribution pension market: the case for greater consolidation’. It noted the “exponential growth” of defined contribution plans since 2012, when automatic enrollment was first introduced. As of 2021, there were 1,560 workplace DC schemes in the UK, with more than 12 members – a reduction from 4,560 in 2010, offering schemes greater scale to achieve better
How Europe’s DC pensions allocate to alternatives Netherlands UK Spain France Denmark 0 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Private equity
Growth fixed income
Real assets
Hedge funds and DGFs (Diversified Growth Funds)
Other
Source: Mercer, 2021
P R IVAT E E QU IT Y W IR E IN S IG H T R E P ORT
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