{"id":13403,"date":"2023-11-01T13:10:40","date_gmt":"2023-11-01T13:10:40","guid":{"rendered":"https:\/\/iqeq.com\/?p=13403"},"modified":"2023-11-29T13:48:14","modified_gmt":"2023-11-29T13:48:14","slug":"embracing-home-bias-how-uk-pension-funds-can-navigate-private-markets","status":"publish","type":"post","link":"https:\/\/iqeq.com\/insights\/embracing-home-bias-how-uk-pension-funds-can-navigate-private-markets\/","title":{"rendered":"Embracing home bias? How UK pension funds can navigate private markets"},"content":{"rendered":"
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The pension reforms announced by UK Chancellor Jeremy Hunt in July are aimed at enhancing productivity and increasing returns on pension savings.<\/strong><\/p>\n

Under what Mr Hunt has dubbed the \u2018Mansion House Compact<\/a>\u2019, major pension funds representing around two-thirds of the UK\u2019s entire defined contribution (DC) workplace market committed to provide savers with more exposure to private markets. The firms \u2013 Aviva, Scottish Widows, L&G, Aegon, Phoenix, Nest, Smart Pension, M&G & Mercer \u2013 pledged to allocate a minimum of 5% of default fund client assets to investments in unlisted equities by the year 2030. This move, Mr Hunt says, is intended to \u201csecure the best possible outcomes for pension savers\u201d and, if the rest of the UK\u2019s DC market follows suit, could unlock up to \u00a350 billion of investment into potentially high-growth UK companies.<\/p>\n

The Mansion House Compact marks the surfacing of concerns about UK pension funds\u2019 lack of domestic exposure, which have been rumbling in the background for some time. According to the government\u2019s Pension Charges Survey<\/a> from 2020, about two-thirds of DC providers have zero exposure to illiquid investments in their default funds, while the remaining third have exposure of between 1.5 and 7%. The main barriers to investing in private markets relate to the high costs associated with these investments, the paper notes. The chancellor has also compared this situation to Australia, where the average pension fund holds around 5 to 6% of assets in unlisted securities.<\/p>\n

Meanwhile the Capital Markets Industry Taskforce wrote to the Chancellor<\/a> back in March outlining how in 2000, 39 per cent of London Stock Exchange Shares were owned by UK pension funds and insurers. By 2020, the figure was 4%. The group also lobbied for consolidation, saying the UK\u2019s DC marketplace was \u201chighly fragmented by international standards\u201d with close to 27,000 schemes, 25,700 of which are \u201cmicro schemes\u201d of fewer than 12 members.<\/p>\n

Putting politics aside, all this points to more pension fund capital flowing into UK private markets in the coming years \u2013 potentially from a consolidated number of large players. If done right, this means pension funds could diversify their portfolios, achieve a premium on investment returns, and manage risk.<\/p>\n

However, as well as new investment risk considerations, pensions funds must consider the fact that this less-regulated asset class may pose operational and back-office challenges. Most pension funds are used to the standardised, regular reporting that they enjoy in the public markets., whereas private market investments are much more difficult to benchmark, reporting is less frequent and the detail of reports varies greatly. Although the back-office functions may not be deemed critical on the surface, they play a crucial role in determining the success of investments. It is through these functions that we gain insights into whether these investments are performing well or not.<\/p>\n

A high degree of specialism is also required. Private equity fund managers will often spend years working with a company and will have a deep understanding of how the respective markets behave. Swiftly following Mr Hunt\u2019s Mansion House speech, the UK\u2019s Pensions Regulator issued a warning<\/a> to pension fund trustees, urging them to explore the expansion of their investment options, including start-ups or other illiquid assets. Nausicaa Delfas, the newly appointed chief executive of The Pensions Regulator, emphasised<\/a> the importance of trustees overseeing defined contribution plans to possess the expertise needed to assess more complex assets. She further advised that if trustees lack the necessary expertise, they should consider consolidating or potentially winding up their schemes. Yet access to comparable data is a challenge, and unless pension fund managers and trustees have the ability to view and analyse that data, it will be like driving the car backwards.<\/p>\n

It is unsurprising, therefore, that technology-driven processes play a crucial role in managing and administering alternative assets. As pension funds action the shift to private markets, access to timely and tailored portfolio information<\/a> is critical. Managers need actionable intelligence through intuitive dashboards designed for their specific requirements. This will empower them to manage their exposures effectively, assess the overall portfolio performance, and even forecast future valuations with ease.<\/p>\n

Mr Hunt\u2019s reforms do indeed have the potential to bring benefits to both pension savers and British industry. However, it is important to recognise that any push into private assets comes with a fair share of challenges. By working with expert providers<\/a>, evaluating the performance of investments through an effective back office, and managing the complexities of private market data, pension funds can maximise the benefits \u2013 and overcome the obstacles.<\/p>\n <\/div>\n<\/section>\n\n

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Meet the author<\/h2>\n
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\n \"\" <\/div>\n
\n \"\" <\/div>\n
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Hugh Stacey<\/h3>\n

Executive Director, Asset Owner Solutions, UK<\/p>\n

<\/div>\n

United Kingdom<\/p>\n \n Send email <\/a>\n \n +44 20 7397 5463 <\/a>\n

\n \n LinkedIn<\/span>\n <\/a>\n <\/div>\n <\/div>\n<\/div> <\/div>\n
\n <\/div>\n <\/div>\n<\/section>","protected":false},"excerpt":{"rendered":"","protected":false},"author":6,"featured_media":13406,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"content-type":"","footnotes":""},"categories":[1],"tags":[],"expertise":[],"service_category":[],"acf":[],"yoast_head":"\nEmbracing home bias? How UK pension funds can navigate private markets - IQ-EQ<\/title>\n<meta name=\"description\" content=\"We expect to see more pension fund capital flow into UK private markets. 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