How private market investments could benefit DC pension savers

In exchange for investing money over the longer term, private markets have the potential to offer an ‘illiquidity premium’

Traditionally, DC pensions have mostly invested in listed assets, which can be easily bought and sold in financial markets. These typically include bonds, shares and exchange-traded funds.

Private markets refer to assets which aren’t listed on exchange markets. They include a wide range of investments, but mainly refer to private equity and venture capital, private credit, infrastructure and real estate.

Private market assets can’t easily be bought and sold, and so they are often referred to as illiquids.

The illiquidity of private market assets means they’re typically suited to investors with longer-term plans – such as pension schemes.

In exchange for investing money over the longer term, private markets have the potential to offer an ‘illiquidity premium’. This refers to an additional return received to compensate for tying up capital in an asset for a longer period – up to a decade or more.

Illiquid investments such as private market assets may also help to diversify portfolios, which can help mitigate long-term investment risks.

Higher fees

However, private market assets are more complex to invest in and manage and this can mean higher fees compared with traditional assets.

Therefore, it is important that investors consider the potential value that investing in private markets brings to an overall portfolio rather than considering fees in isolation.

To do this, it is critical that appropriate governance and operational requirements are in place to manage these complexities when constructing a portfolio.

What private markets could offer

LGIM has offered private market asset classes to DC arrangements for years. Investment in high-growth sectors such as science and technology, clean power and affordable homes offers a potential opportunity to boost the UK and global economy, as well creating potential value for the millions saving for their retirement.

Private markets can also seek to deliver ESG benefits, in some cases delivering real-world impact alongside public markets within a DC investment strategy.

For example, by investing in a clean power private market fund, a pension scheme could directly contribute to the development of a wind or solar farm, and bolster the clean energy transition.

Another example is affordable housing – a scheme could invest directly in the delivery of affordable homes for local communities, providing a powerful contribution to society while seeking to deliver better overall financial outcomes for members.

In February this year, an expert panel comprising pensions and venture capital specialists was formed to examine how retirement funds might be directed into UK start-up projects.

This followed the signing of the UK Government’s Mansion House Compact in 2023 where 10 leading UK pension providers, including Legal & General, committed themselves to allocating 5% of assets in their default pension funds to unlisted equities by 2030.

Delivering value

In general, despite illiquid assets costing more to invest in than liquid assets, private markets have the potential to deliver greater overall value for members through a combination of diversification and access to a wider range of investment opportunities.

By making investments in a broader range of assets accessible to members, we can unlock opportunities that could benefit their pension pots as well as in some cases, seeking to providing wider social and economic benefits.

For more information on LGIM’s research and thought leadership on private markets, listen to John Roe, LGIM’s Head of Multi-asset Funds, and Jesal Mistry, Head of DC Investment Proposition and Governance discuss the pros and cons here.