One report is estimating that defined contribution schemes will have increased their holdings in private debt to £200bn in the next six and a half years.
Pension funds have been making more room for illiquid assets over the last few years as scheme funding levels have improved.
This shift will gather more pace with more defined contribution assets committed to private debt investments by the end of the decade, according to one pensions consultant.
Hymans Robertson has published a report - Illiquid Investment: Embracing the Opportunities - which proposes that private debt has a role to play in all stages of a DC glidepath.
As pension funds question whether they can afford to invest in private equity Hymans argues that there is scope to "introduce material allocations to illiquids assets more generally and radically improve the retirement outcomes for millions of savers".
Oliver Hook, DC investment consultant at Hymans Robertson, said the DC investment landscape was on the brink of a sea-change.
"We have seen the UK government begin to encourage investment from pension schemes into private markets through initiatives such as the Patient Capital review, the introduction of LTAFs, and now the Mansion House Compact.
"The barriers are gradually being broken down and our ambition is that parity will be achieved between DB and DC with regards to accessing private markets. “We believe that private debt has a role to play throughout DC glidepaths thanks to its heterogeneity, diversification benefits, and stable income streams. It is our view that private debt and other illiquid assets will improve outcomes for DC members and we continue to push for further evolution from the industry in this area.”
Long term asset funds
Illiquid assets explained
Pension funds have long had a very small exposure to illiquid assets - which are asset classes which can easily be divested - such as start up companies or even commercial property
Until the last few years they have largely avoided as a main asset class, but pension funds - fuelled by larger surpluses and improved funding have been able to look more closely at the assets.
The city watchdog is starting to allow mass market retail investors, self select DC pension schemes and self-invested personal pensions (SIPPs) to access long term asset funds (LTAFs) but the move has already been questioned by the investment industry.
Long term assets funds (LTAF) are an open-ended collective investment asset introduced by the Financial Conduct Authority (FCA) in 2021.
They were designed to invest efficiently in long-term, illiquid assets, including venture capital, private equity and private debt, real estate and infrastructure but have preciously only been available to professional investors, certified and self-certified sophisticated investors, and certified high net worth individuals (HNWI). Additionally, pensions exposure to the LTAF was restricted to defined benefit (DB), and the default arrangement within qualifying defined contribution (DC) schemes.
The FCA said LTAFs were a higher risk product which could provide greater diversification to investment portfolios "in exchange for potentially higher returns but less immediate liquidity and longer redemption periods".
In its policy statement Broadening retail and pensions access to the long-term asset fund published today the FCA said LTAFs would be made more widely available to allow investment in what it called "productive finance".
The watchdog said it recognised that long-term investments were riskier so investors would need to be given clear risk warnings and customer assessments.
