Potential £250bn of DC assets could be invested in private equity, report finds

There is a potential £250bn (€282bn) of defined contribution (DC) assets that could be committed to private equity investments by the end of the decade, according to consultancy Hymans Robertson.

The firm’s latest research report – Embracing the opportunities: Unlocking growth potential from private companies – warns that a shift in mindset is required to meet this goal.

The report found that significant allocations to private equity have the potential to improve retirement outcomes for DC savers by well in excess of 10% based on a consensus view of returns.

Hymans Robertson also found there is scope to introduce material allocations to illiquids assets more generally and radically improve the retirement outcomes for millions of savers.

The report looks at different types of private equity investments and, in particular, considers how to build a diversified portfolio to reduce risk, manage liquidity and target overall value.

The findings revealed that there are opportunities for pensions schemes to integrate their wider sustainability and climate goals as part of their wider portfolio as well.

Callum Stewart, head of DC investment at Hymans Robertson, said: “The last decade has been a time of change for the UK, with the government looking to encourage long-term investment in the UK economy and try to breakdown some of the barriers to investing in illiquid asset classes through initiatives such as the Patient Capital review, the ‘Levelling Up’ agenda and guidance produced by the Productive Finance Working Groups.”

The UK government’s “Patient Capital” review back in 2017 – a plan to encourage long-term investment in the UK economy – aimed to breakdown some of the barriers to investing in illiquid asset classes, while last year’s ‘Levelling Up’ plan set out the government’s intention to mobilise £16bn of Local Government Pension Scheme capital for investments in local projects and supporting the private sector.

Hymans Robertson’s research found that there is potential for exceptional net return from private equity investments, “however, the variability of returns can be vast, and selecting high-quality managers will be crucial to longer-term success”, Stewart said.

According to the report, average DC schemes could target an allocation of up to 20% to illiquid investments during the growth phase, with higher conviction schemes able to go further before compromising the resilience of their portfolios.

“Within this, we see a significant role for private equity assets in the earlier stages of a savings journey, reducing substantially before reaching retirement,” he said.

The report noted that blended or target-date funds are now an essential feature for future-proofing DC schemes’ investment strategies. This means changes to the underlying asset allocation can be made without creating onerous consultation and reporting requirements each time a change is made.

It also means liquidity management and rebalancing can be structured efficiently, the paper continued. This will be increasingly important as the ability for DC schemes to access more sophisticated asset classes and fund structures improves, it added.

Stewart said: “Taking such a risk can pay off and we found that there is the potential for up to £250bn of DC asset classes to be committed in this way by the end of the decade. A change of mindset is needed to truly deliver better outcomes for members, with a diversified thought process towards longer-term value rather than short-term cost.”

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