Change on the horizon for UK DC pensions

The UK government this year gave defined contribution schemes more flexibility to invest in illiquid assets via the long-term asset fund.

One of the biggest moves in the UK this year was the launch of the long-term asset fund, which eases access for institutional and other investors to private equity, venture capital and other illiquid assets.

According to a statement in May, the UK’s Financial Conduct Authority intended, as a result of the LTAF’s launch, to address the focus of defined contribution schemes “on the costs of investing, potentially at the expense of net returns”. It also aimed to address an “investment culture that favours investment in daily dealing funds”, which have inhibited investment in illiquid assets.

The regulator unveiled plans to create a new regime and ease capital raising rules via the LTAF – a new, open-end fund structure. It began consultation in May, new regulatory rules and guidance for the LTAF were published in October, and these came into force in mid-November. In early December, the FCA gave trustees more flexibility over how they account for performance fees in the charge cap.

Schemes are subject to a 0.75 percent cap on charges on assets under management and administration – an annual amount charged to savers that applies to all scheme administration and investment fees.

The LTAF is a welcome development for DC pension schemes as well as high-net-worth investors, who traditionally have been unable or unwilling to invest in long-term illiquid assets due to their higher fees. In fact, the FCA reported that a survey from the UK’s Department for Work and Pensions found that two-thirds of the country’s DC schemes do not invest in illiquid assets, while the remaining third invest between 1.5 percent and 7 percent, mainly in property.

Assets managed by UK DC schemes are forecast to grow to more than £1 trillion ($1.4 trillion; €1.2 trillion) in assets by 2030 as result of automatic enrolment, from £340 billion in assets in 2015, according to the FCA.

DC schemes are gradually getting more comfortable with private markets. The National Employment Savings Trust, which manages £20 billion of AUM on behalf of 10 million members, said in August that it is set to invest about £1.5 billion, or 5 percent of its assets, in growth and mid-market private equity by the end of 2024. NEST was already investing in private credit and infrastructure.

This approach would mean providing capital to “platforms with a large amount of high-quality co-investment dealflow”, NEST’s head of private markets Stephen O’Neill told Private Equity International in June. He added that it would also mean paying managers a “reasonable fee” for the service, which is “not remotely near the two-and-20 that one would have to pay for a commitment to a traditional blind pool fund”.

In November, TPT Retirement Solutions, a £13 billion workplace pension scheme, said in a statement that it will deploy £54 million into listed private equity assets, such as investment trusts and the stock of listed PE firms.

Meanwhile, Partners Group, which manages the Generations Fund – an open-end, commingled vehicle that provides institutional UK DC pension investors with exposure to private equity, private debt, private infrastructure and private real estate investments – told PEI it could look into creating separately managed accounts for master trusts or a cluster of DC single-employer pension schemes, following the latest developments.