While long-term asset funds (LTAFs) have broadened access to private markets over the past few years, UK defined contribution (DC) pension schemes had already been accessing private markets through several alternative routes for decades – though allocations have remained low compared to their defined benefit counterparts.
“Historically, UK DC pension plans have struggled to invest in private markets, but we’ve found that where there’s a will, there’s a way,” said David Hutchins, portfolio manager at AllianceBernstein.
There are several ways DCs have historically accessed private markets investments. One route was through insurance company platforms, where pension schemes could invest via unit-linked funds that hold illiquid assets within the insurer’s balance sheet. The insurance wrapper provides the daily dealing mechanism that DC schemes require, while the insurer manages liquidity through its broader pooled arrangements.
This approach has been more prevalent among contract-based workplace pensions, with master trusts and group personal pensions accessing private credit and real estate through insurers’ diversified growth funds.
Read more: Scottish Widows rolls out new LTAFs
Multi-asset diversified growth funds have also served as a gateway to alternatives for DC schemes. With this approach, the fund manager handles the liquidity mismatch internally. Some well-resourced DC schemes have also made direct allocations to closed-ended private market funds, managing liquidity through careful portfolio construction.
Despite a range of available mechanisms to invest in private markets, DC scheme allocation has historically been very low. The government estimates DC schemes currently allocate 3.5 per cent to private market asset classes. This is because of barriers like daily dealing requirements for DC schemes, which have historically necessitated complex workarounds, as well as the operational burden of reporting for illiquid assets.
Read more: Private market allocations rise as DC funds turn to debt
“Private markets investments are illiquid and traditionally were only available in closed-ended funds with a scheduled wind-down date,” said Hutchins. “That was a problem for DC savers: although their daily liquidity needs are typically low, they still need some cash-flow management for regular contributions, strategy rebalancing or de-risking, and withdrawals.”
Contract-based schemes, representing roughly half the DC market, have faced additional constraints as platform administrators have struggled to accommodate alternatives within their technology infrastructure.
LTAFs are a UK vehicle that have been specifically designed to enable DC investment in private markets, and, unlike previous workarounds, provide a standardised regulatory framework with appropriate liquidity management tools to accommodate illiquid holdings. Experts say this should lead to greater private markets allocations in DC schemes.
Steve Webb, former pensions minister, now partner at LCP, said: “DC schemes have been able to invest in private markets before LTAFs came along, but LTAFs have certainly made things easier.
“Although there aren’t many master trusts which (until recently) had much of an allocation in this space, we advise a lot of the biggest single employer trusts and they can have significant private market allocations – indeed, some were name checked by the pensions minister last year as examples for others to follow.”
The number of LTAFs on offer has grown over the past few years, which, coupled with the Mansion House Accord’s target of 10 per cent of assets allocated to private markets by 2030, could be the start of a much bigger shift towards private markets exposure in DC portfolios.
Recent Alternative Credit Investor analysis found that there are now more than 25 LTAFs on the market, while Morningstar data showed that approved LTAFs have collectively hit £5m of assets under management.
Read more: UK LTAFs gain momentum as DC pensions target private markets
