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The push to get UK pension funds to invest more in private markets would boost returns by just 2 per cent over a 30-year period, according to the government’s own forecasts.
In her Mansion House speech earlier this month, chancellor Rachel Reeves announced proposals to create a series of “megafunds” across the UK’s £1.3tn defined contribution and local authority pension industry to drive more investment into UK infrastructure projects and start-ups.
Policymakers have also argued that larger pension funds with higher exposure to private markets will deliver better returns for savers.
But forecasts from the government’s actuarial department show its “private market” model portfolio — with 10 per cent of assets allocated to infrastructure and 5 per cent to private equity — delivered just 2 per cent more over 30 years than its equivalent “baseline” portfolio without exposure to private markets.
Defined contribution schemes are estimated to have an average of 1 per cent of assets currently allocated to private equity and 3 per cent to infrastructure.
“[This] is a tiny difference given the uncertainty when you are modelling pension accruals over a period of decades,” said Steve Webb, a former Liberal Democrat minister and now a partner with pensions consultancy LCP.
“It’s not a ringing endorsement if good member outcomes are your top priority,” he added.
The government’s calculations were based on rating agency Moody’s capital market assumptions. The higher fees charged in private markets could be one reason for the lack of a boost to returns — the forecasts assumed charges of 1 per cent and a 10 per cent performance fee for private markets, compared to fees of 0.25 per cent for all other asset classes.
The government has laid out plans to consolidate pension assets into portfolios of at least £25bn across defined contribution and local authority funds, a move it estimates could release up to £80bn of capital to be reallocated for investment in UK infrastructure projects and fast-growing businesses.
In a “low-risk”’ scenario, the government forecast a portfolio with private market exposure would deliver returns 4 per cent higher than its baseline counterpart — as infrastructure tends to have a lower risk profile than equities — but in a “high-risk”’ case that advantage collapsed to 0.3 per cent over a 30-year timeframe.
Referring to raising funds’ allocations to private markets, Tom McPhail, director of public affairs at consultancy the Lang Cat said “the government’s argument that they’ve spotted an investment opportunity the whole pensions industry has collectively and repeatedly overlooked seems tenuous and a bit desperate”.
But he added that there was a “strong argument” that pension provision in the UK should be consolidated into “fewer, bigger, better-run schemes which are then likely to deliver improvements in value for money”.
In an interview with the Financial Times last week, pensions minister Emma Reynolds said she needed pension funds to invest more in British infrastructure and start-ups.
She also said she was “convinced that there are better returns to be had by having bigger schemes”, pointing to the most successful defined contribution pension funds in Australia which she said have outperformed UK rivals and have a much higher allocation to private equity and infrastructure.
But when asked if pension schemes would have performed better if they had invested as she would have liked over the past decade, she said it was “difficult to say”. She also said the government could consider forcing pension schemes to invest more in British assets if reforms failed to drive savings into domestic infrastructure and companies.
Tom Selby, director of public policy at AJ Bell, said there were “absolutely no guarantees” that increasing private equity allocations would deliver better returns for pension schemes.
“The danger in conflating government economic policy with people’s pensions is the latter will be risked in pursuit of the former . . . any claim that private equity guarantees better pensions needs to be treated with extreme scepticism,” he said.
A government spokesperson said the chancellor’s Mansion House speech was “the first step to transforming our fragmented pensions landscape, with measures set to unlock £80bn to drive growth, invest in exciting new businesses and critical infrastructure, while boosting defined contribution savers’ pension pots”.