.jpeg)
Pensions for Purpose podcast: Investing in the UK
Learn moreInstitutional Investments
The changing landscape of pension scheme investment: a shift towards consolidation and private markets?
15/4/24
5 min
Investment news
Insight
In this article, Kostas Manolis, Partner and Head of Private Market Investments, explores the results of a Downing survey covering some of the changes to the pension landscape that has been influenced by market and political pressures.
The last 24 months have seen some changes across the UK pension landscape, with market and political pressures appearing set to influence both asset allocations and speed of consolidation. But are they affecting public and private pensions in the same way?
In a move aimed at streamlining the Local Government Pension Schemes (LGPS) landscape, the UK government has proposed a consolidation plan that would see pool sizes grow to at least £50bn of assets under management with the trend continuing to minimum pool sizes of £200bn by 2040 when funds are projected to be close to £1trillion in size. Alongside the expected efficiencies to be gained from running increased, consolidated blocks of capital, it is likely that these larger pools will be better set up to access asset classes that were previously more challenging for smaller pension funds due to the expertise and efficiencies required (including private markets through SMAs and direct investments).
Reactions from LGPS stakeholders to these proposals have been mixed. While consolidation might bring increased buying power and expertise as well as increased investment in private markets that may generate higher returns, it also presents perceived threats to independence and may introduce higher risks. Asset allocators, accustomed to retaining discretion over investment decisions, may find the prospect of relinquishing a lot of control unsettling.
Further political pressure has been levelled on pension schemes regarding private asset allocation proportions. Mansion House guidelines suggest LGPS double their existing scheme allocations in private equity to 10%, which could unlock a further £25 billion by 2030.
Further political pressure has been levelled on pension schemes regarding private asset allocation proportions.
In light of the above, a recent Downing survey evaluates the sentiment within the UK LGPS community compared with their private sector counterparts, regarding capital allocation. The survey suggests that many stakeholders are aligned with the government's proposal for greater allocations to illiquid assets. This suggests a growing recognition of the potential benefits of private market strategies.
Regarding private equity, our research has indicated over 25% of our public pension respondents are seeking to increase their allocations by 50% or more to this asset class over the next three years, displaying markedly greater appetite than their private pension counterparts. Similarly, in private debt, there was notably more interest in larger increases to this asset class allocation within public pension funds than in private. Public sector pension respondents sought to increase their allocations to private equity by an implied average of 27% and to private debt by 26%, compared with intended increases of 18% and 16% for private pension schemes in the same asset classes respectively.
Similarly, public pension funds are demonstrating a greater appetite for bolstering their allocations to a range of other alternative asset classes than their private pension peers. Our survey indicates that, on average, public schemes are seeking to increase their allocations to Venture Capital by 36%, Infrastructure by 31% and Real Estate by 24%. Private pension schemes strike a more cautious tone regarding these asset classes, intending to only increase their allocations on average to Venture Capital by 18%, Infrastructure by 17% and Real Estate by 16%.
As seen across private debt and equity, the appetite for less liquid and less traditional investment structures appears to sit far more with the public than private pension schemes in the UK. This is evidenced further by current allocation compositions, with public funds already more heavily invested in typically illiquid asset classes, holding 18% of their assets in private markets compared with 14% in private DB and 6% in private DC schemes respectively (see figure 3). LGPS schemes are typically still open to new accruals and are less mature than the vast majority of private DB funds, suggesting a rationale for their current, and apparently growing, appetite for growth focused illiquid assets.
Private DB schemes, managing c.£1.4 trillion in assets, have committed 14% of their portfolios to alternatives, property and unlisted equities. Private DC funds, managing c.545bn in assets, on the other hand, show a reluctance to deviate from more liquid investments as they have only committed 6% of their allocations to these asset classes. Could the explanation for this be that DB schemes, which are not all fully funded, are keener to pursue capital growth by investing in higher risk assets to meet their obligatory cash outflows, compared to their DC counterparts that are not required to meet fixed liabilities in the same way?
As risk appetites and investment strategies evolve and adapt to policy changes, it is becoming evident that pension scheme managers are becoming more willing to allocate capital to private markets, at a seemingly accelerated rate within the public sector compared with their private counterparts, as they continue to seek ways to diversify and increase the returns within their investment portfolios.
If you would like to discuss any of the views within this article or sign up for our insights newsletter, please get in touch
Share
Contents
See full contents
In this article, Kostas Manolis, Partner and Head of Private Market Investments, explores the results of a Downing survey covering some of the changes to the pension landscape that has been influenced by market and political pressures.
The last 24 months have seen some changes across the UK pension landscape, with market and political pressures appearing set to influence both asset allocations and speed of consolidation. But are they affecting public and private pensions in the same way?
In a move aimed at streamlining the Local Government Pension Schemes (LGPS) landscape, the UK government has proposed a consolidation plan that would see pool sizes grow to at least £50bn of assets under management with the trend continuing to minimum pool sizes of £200bn by 2040 when funds are projected to be close to £1trillion in size. Alongside the expected efficiencies to be gained from running increased, consolidated blocks of capital, it is likely that these larger pools will be better set up to access asset classes that were previously more challenging for smaller pension funds due to the expertise and efficiencies required (including private markets through SMAs and direct investments).
Reactions from LGPS stakeholders to these proposals have been mixed. While consolidation might bring increased buying power and expertise as well as increased investment in private markets that may generate higher returns, it also presents perceived threats to independence and may introduce higher risks. Asset allocators, accustomed to retaining discretion over investment decisions, may find the prospect of relinquishing a lot of control unsettling.
Further political pressure has been levelled on pension schemes regarding private asset allocation proportions. Mansion House guidelines suggest LGPS double their existing scheme allocations in private equity to 10%, which could unlock a further £25 billion by 2030.
Further political pressure has been levelled on pension schemes regarding private asset allocation proportions.
In light of the above, a recent Downing survey evaluates the sentiment within the UK LGPS community compared with their private sector counterparts, regarding capital allocation. The survey suggests that many stakeholders are aligned with the government's proposal for greater allocations to illiquid assets. This suggests a growing recognition of the potential benefits of private market strategies.
Regarding private equity, our research has indicated over 25% of our public pension respondents are seeking to increase their allocations by 50% or more to this asset class over the next three years, displaying markedly greater appetite than their private pension counterparts. Similarly, in private debt, there was notably more interest in larger increases to this asset class allocation within public pension funds than in private. Public sector pension respondents sought to increase their allocations to private equity by an implied average of 27% and to private debt by 26%, compared with intended increases of 18% and 16% for private pension schemes in the same asset classes respectively.
Similarly, public pension funds are demonstrating a greater appetite for bolstering their allocations to a range of other alternative asset classes than their private pension peers. Our survey indicates that, on average, public schemes are seeking to increase their allocations to Venture Capital by 36%, Infrastructure by 31% and Real Estate by 24%. Private pension schemes strike a more cautious tone regarding these asset classes, intending to only increase their allocations on average to Venture Capital by 18%, Infrastructure by 17% and Real Estate by 16%.
As seen across private debt and equity, the appetite for less liquid and less traditional investment structures appears to sit far more with the public than private pension schemes in the UK. This is evidenced further by current allocation compositions, with public funds already more heavily invested in typically illiquid asset classes, holding 18% of their assets in private markets compared with 14% in private DB and 6% in private DC schemes respectively (see figure 3). LGPS schemes are typically still open to new accruals and are less mature than the vast majority of private DB funds, suggesting a rationale for their current, and apparently growing, appetite for growth focused illiquid assets.
Private DB schemes, managing c.£1.4 trillion in assets, have committed 14% of their portfolios to alternatives, property and unlisted equities. Private DC funds, managing c.545bn in assets, on the other hand, show a reluctance to deviate from more liquid investments as they have only committed 6% of their allocations to these asset classes. Could the explanation for this be that DB schemes, which are not all fully funded, are keener to pursue capital growth by investing in higher risk assets to meet their obligatory cash outflows, compared to their DC counterparts that are not required to meet fixed liabilities in the same way?
As risk appetites and investment strategies evolve and adapt to policy changes, it is becoming evident that pension scheme managers are becoming more willing to allocate capital to private markets, at a seemingly accelerated rate within the public sector compared with their private counterparts, as they continue to seek ways to diversify and increase the returns within their investment portfolios.
If you would like to discuss any of the views within this article or sign up for our insights newsletter, please get in touch
Share
In this article, Kostas Manolis, Partner and Head of Private Market Investments, explores the results of a Downing survey covering some of the changes to the pension landscape that has been influenced by market and political pressures.
The last 24 months have seen some changes across the UK pension landscape, with market and political pressures appearing set to influence both asset allocations and speed of consolidation. But are they affecting public and private pensions in the same way?
In a move aimed at streamlining the Local Government Pension Schemes (LGPS) landscape, the UK government has proposed a consolidation plan that would see pool sizes grow to at least £50bn of assets under management with the trend continuing to minimum pool sizes of £200bn by 2040 when funds are projected to be close to £1trillion in size. Alongside the expected efficiencies to be gained from running increased, consolidated blocks of capital, it is likely that these larger pools will be better set up to access asset classes that were previously more challenging for smaller pension funds due to the expertise and efficiencies required (including private markets through SMAs and direct investments).
Reactions from LGPS stakeholders to these proposals have been mixed. While consolidation might bring increased buying power and expertise as well as increased investment in private markets that may generate higher returns, it also presents perceived threats to independence and may introduce higher risks. Asset allocators, accustomed to retaining discretion over investment decisions, may find the prospect of relinquishing a lot of control unsettling.
Further political pressure has been levelled on pension schemes regarding private asset allocation proportions. Mansion House guidelines suggest LGPS double their existing scheme allocations in private equity to 10%, which could unlock a further £25 billion by 2030.
Further political pressure has been levelled on pension schemes regarding private asset allocation proportions.
In light of the above, a recent Downing survey evaluates the sentiment within the UK LGPS community compared with their private sector counterparts, regarding capital allocation. The survey suggests that many stakeholders are aligned with the government's proposal for greater allocations to illiquid assets. This suggests a growing recognition of the potential benefits of private market strategies.
Regarding private equity, our research has indicated over 25% of our public pension respondents are seeking to increase their allocations by 50% or more to this asset class over the next three years, displaying markedly greater appetite than their private pension counterparts. Similarly, in private debt, there was notably more interest in larger increases to this asset class allocation within public pension funds than in private. Public sector pension respondents sought to increase their allocations to private equity by an implied average of 27% and to private debt by 26%, compared with intended increases of 18% and 16% for private pension schemes in the same asset classes respectively.
Similarly, public pension funds are demonstrating a greater appetite for bolstering their allocations to a range of other alternative asset classes than their private pension peers. Our survey indicates that, on average, public schemes are seeking to increase their allocations to Venture Capital by 36%, Infrastructure by 31% and Real Estate by 24%. Private pension schemes strike a more cautious tone regarding these asset classes, intending to only increase their allocations on average to Venture Capital by 18%, Infrastructure by 17% and Real Estate by 16%.
As seen across private debt and equity, the appetite for less liquid and less traditional investment structures appears to sit far more with the public than private pension schemes in the UK. This is evidenced further by current allocation compositions, with public funds already more heavily invested in typically illiquid asset classes, holding 18% of their assets in private markets compared with 14% in private DB and 6% in private DC schemes respectively (see figure 3). LGPS schemes are typically still open to new accruals and are less mature than the vast majority of private DB funds, suggesting a rationale for their current, and apparently growing, appetite for growth focused illiquid assets.
Private DB schemes, managing c.£1.4 trillion in assets, have committed 14% of their portfolios to alternatives, property and unlisted equities. Private DC funds, managing c.545bn in assets, on the other hand, show a reluctance to deviate from more liquid investments as they have only committed 6% of their allocations to these asset classes. Could the explanation for this be that DB schemes, which are not all fully funded, are keener to pursue capital growth by investing in higher risk assets to meet their obligatory cash outflows, compared to their DC counterparts that are not required to meet fixed liabilities in the same way?
As risk appetites and investment strategies evolve and adapt to policy changes, it is becoming evident that pension scheme managers are becoming more willing to allocate capital to private markets, at a seemingly accelerated rate within the public sector compared with their private counterparts, as they continue to seek ways to diversify and increase the returns within their investment portfolios.
If you would like to discuss any of the views within this article or sign up for our insights newsletter, please get in touch
Share
In this article, Kostas Manolis, Partner and Head of Private Market Investments, explores the results of a Downing survey covering some of the changes to the pension landscape that has been influenced by market and political pressures.
The last 24 months have seen some changes across the UK pension landscape, with market and political pressures appearing set to influence both asset allocations and speed of consolidation. But are they affecting public and private pensions in the same way?
In a move aimed at streamlining the Local Government Pension Schemes (LGPS) landscape, the UK government has proposed a consolidation plan that would see pool sizes grow to at least £50bn of assets under management with the trend continuing to minimum pool sizes of £200bn by 2040 when funds are projected to be close to £1trillion in size. Alongside the expected efficiencies to be gained from running increased, consolidated blocks of capital, it is likely that these larger pools will be better set up to access asset classes that were previously more challenging for smaller pension funds due to the expertise and efficiencies required (including private markets through SMAs and direct investments).
Reactions from LGPS stakeholders to these proposals have been mixed. While consolidation might bring increased buying power and expertise as well as increased investment in private markets that may generate higher returns, it also presents perceived threats to independence and may introduce higher risks. Asset allocators, accustomed to retaining discretion over investment decisions, may find the prospect of relinquishing a lot of control unsettling.
Further political pressure has been levelled on pension schemes regarding private asset allocation proportions. Mansion House guidelines suggest LGPS double their existing scheme allocations in private equity to 10%, which could unlock a further £25 billion by 2030.
Further political pressure has been levelled on pension schemes regarding private asset allocation proportions.
In light of the above, a recent Downing survey evaluates the sentiment within the UK LGPS community compared with their private sector counterparts, regarding capital allocation. The survey suggests that many stakeholders are aligned with the government's proposal for greater allocations to illiquid assets. This suggests a growing recognition of the potential benefits of private market strategies.
Regarding private equity, our research has indicated over 25% of our public pension respondents are seeking to increase their allocations by 50% or more to this asset class over the next three years, displaying markedly greater appetite than their private pension counterparts. Similarly, in private debt, there was notably more interest in larger increases to this asset class allocation within public pension funds than in private. Public sector pension respondents sought to increase their allocations to private equity by an implied average of 27% and to private debt by 26%, compared with intended increases of 18% and 16% for private pension schemes in the same asset classes respectively.
Similarly, public pension funds are demonstrating a greater appetite for bolstering their allocations to a range of other alternative asset classes than their private pension peers. Our survey indicates that, on average, public schemes are seeking to increase their allocations to Venture Capital by 36%, Infrastructure by 31% and Real Estate by 24%. Private pension schemes strike a more cautious tone regarding these asset classes, intending to only increase their allocations on average to Venture Capital by 18%, Infrastructure by 17% and Real Estate by 16%.
As seen across private debt and equity, the appetite for less liquid and less traditional investment structures appears to sit far more with the public than private pension schemes in the UK. This is evidenced further by current allocation compositions, with public funds already more heavily invested in typically illiquid asset classes, holding 18% of their assets in private markets compared with 14% in private DB and 6% in private DC schemes respectively (see figure 3). LGPS schemes are typically still open to new accruals and are less mature than the vast majority of private DB funds, suggesting a rationale for their current, and apparently growing, appetite for growth focused illiquid assets.
Private DB schemes, managing c.£1.4 trillion in assets, have committed 14% of their portfolios to alternatives, property and unlisted equities. Private DC funds, managing c.545bn in assets, on the other hand, show a reluctance to deviate from more liquid investments as they have only committed 6% of their allocations to these asset classes. Could the explanation for this be that DB schemes, which are not all fully funded, are keener to pursue capital growth by investing in higher risk assets to meet their obligatory cash outflows, compared to their DC counterparts that are not required to meet fixed liabilities in the same way?
As risk appetites and investment strategies evolve and adapt to policy changes, it is becoming evident that pension scheme managers are becoming more willing to allocate capital to private markets, at a seemingly accelerated rate within the public sector compared with their private counterparts, as they continue to seek ways to diversify and increase the returns within their investment portfolios.
If you would like to discuss any of the views within this article or sign up for our insights newsletter, please get in touch
Please fill out the form to download the full report
Share
Sign up to stay up to date with the latest insights and investment opportunities
Learn more
Related Insights
View all
Downing LLP does not provide advice or make personal recommendations and investors are strongly urged to seek independent advice before investing. Investments offered on this website carry a higher risk than many other types of investment and prospective investors should be aware that capital is at risk and the value of their investment may go down as well as up. Any investment should only be made on the basis of the relevant product literature and your attention is drawn to the risk, fees and taxation factors contained therein. Tax treatment depends on individual circumstances of each investor and may be subject to change in the future. Past performance is not a reliable indicator of future performance. Downing LLP is authorised and regulated by the Financial Conduct Authority (Firm Reference Number 545025). Registered in England No. OC341575. Registered Office: Downing, 10 Lower Thames Street, London, EC3R 6AF.
VAT Number: 112 940 149