UK defined contribution (DC) pension schemes could invest between £40bn and £200bn in UK private markets by 2035 as consolidation creates larger schemes with greater capacity to diversify, according to research from Standard Life and WPI Economics.
The report, From scale to impact: A blueprint for the future DC pensions market, projects that the UK workplace DC market could be dominated by 10 to 15 larger schemes by 2035, each managing more than £50bn of assets.
It suggests default funds could allocate 15% to 30% of assets to private markets during the growth phase of retirement saving, compared with around 2% to 4% today.
The composition of those allocations could also broaden, with private equity and venture capital accounting for 30% to 50% of private market allocations, private credit 20% to 40%, and infrastructure and real assets 20% to 40%.
The report said future defaults could therefore move away from relying on a single private asset class towards more diversified private-market portfolios.
It also estimates that 30% to 50% of private market investments could be allocated to UK opportunities, compared with around 5% to 10% of listed equity investments.
This could result in £40bn to £200bn of DC assets being invested in UK private markets by 2035, compared with an estimated £2bn to £3bn invested in private markets by today’s master trusts.
Jenny Holt, product director at Standard Life, said: “Interest in private markets has grown significantly in recent years, but adoption across the workplace pensions market is developing at different speeds.
“This research explores how the DC market could evolve over the longer term if schemes continue to consolidate and gain greater scale. In that environment, larger schemes may be better placed to access a broader range of investment opportunities and build more diversified portfolios.”
He added that ultimately, the focus should not be on allocation targets alone, but on the value private market investments can deliver for members.
“Different schemes are likely to take different approaches as the market develops, but any investment strategy should remain focused on improving member outcomes, delivering value for money and being supported by strong governance and a clear investment rationale,” he explained.
Joe Ahern, director of policy at WPI Economics, said: “Scale changes what pension schemes can invest in and how they invest. Larger schemes are better positioned to access a wider range of opportunities, build specialist expertise and construct more diversified portfolios across different private market asset classes.
“The challenge now is ensuring the wider regulatory and commercial environment supports schemes in accessing those opportunities while maintaining a relentless focus on delivering value for savers.”
