The Pensions Regulator and the Bank of England are launching separate exploratory exercises focusing on private markets, as pension scheme interest grows and the government continues to push for more domestic allocations.
For several years, successive governments have pushed for pension schemes to allocate more to domestic assets. This culminated in the Mansion House Accord, signed earlier this year by 17 pension providers, in which institutions committed to allocating to private markets – as long as appropriate assets are available.
In an announcement today (8 December), the Pensions Regulator (TPR) set out plans to interrogate how pension schemes are investing in “growth assets” such as private equity and to identify potential barriers to access.
“TPR is uniquely placed to engage directly with DC and DB schemes to better understand their approach to investing in private markets and infrastructure, as well as the current challenges and barriers they face.”
Nausicaa Delfas, The Pensions Regulator
The regulator said it was analysing “the range of market opportunities and investment vehicles available to pension schemes, their limitations, barriers and enablers, with an emphasis on UK investment opportunities”.
It will share findings of the work with the government and produce a market oversight report in the new year.
TPR said it had already seen signs that pension schemes were making allocations in line with the Mansion House Accord, and trustees were actively considering “more diversified investment strategies”.
However, Julian Lyne, TPR’s executive director of market oversight, emphasised: “Where schemes fall short, we will be asking trustees to consider whether it would be in savers’ interests to consolidate into larger vehicles with greater investment capabilities.”
Encouraging long-term investment
TPR said it wanted to “help to create the conditions for schemes to consider investing in a pipeline of assets with long-term benefits for pension savers”. Its work is focused on schemes with “material scale” with the ability, or potential, to invest in growth assets. The work will cover defined benefit (DB) and defined contribution (DC) pension schemes.
Chief executive Nausicaa Delfas said: “TPR is uniquely placed to engage directly with DC and DB schemes to better understand their approach to investing in private markets and infrastructure, as well as the current challenges and barriers they face. We hope our research will provide insight to help trustees consider investment in diverse assets to achieve better returns for savers.”
Lyne added that the work would tie in with the regulator’s efforts on raising trusteeship and governance standards. “We expect trustees to acquire the skills, capabilities and access to professional advice to consider investing in diversified portfolios,” he said.
While data on private markets allocations varies widely according to different sources, with differences in definitions and style of reporting, many pension schemes have been adding to their investments in private equity and other illiquid assets in recent months.
Research by the Pensions Management Institute highlighted that private markets allocations have almost tripled since 2019, rising from 9% to 26% across UK pension schemes.
Bank to stress-test private markets
Separately, the Bank of England (BoE) has launched a stress test exercise aimed at the UK’s private equity and debt markets, in an effort to measure how stress situations could affect the wider economy. The exercise will involve working with banks, asset managers, and institutional investors such as pension schemes, and is being conducted with the support of other regulators, including TPR.
“This exercise provides a unique opportunity to work collaboratively with firms to build that system-wide understanding together.”
Sarah Breeden, Bank of England
It is the second time the bank has conducted a stress test of a specific asset class, after its work on the gilts, repo, and sterling corporate bond markets in the wake of the gilts market crash in 2022.
Announcing the launch of the “System-Wide Exploratory Scenario” (SWES) exercise, the bank said the global market for private equity and private credit combined had grown from $3trn to $11trn over the past 10 years. This had significantly increased the asset classes’ importance to UK companies and the economy.
While this expansion had brought “many benefits”, the BoE pointed out that “the resilience of private markets, in their current form, to a severe downturn has not been tested yet”.
Sarah Breeden, deputy governor for financial stability, said: “Private equity and private credit play an increasingly valuable role in helping UK companies to innovate, invest and grow.
“To keep delivering those benefits, we need a robust understanding of how risks might flow through the financial system in a stress [scenario]. This exercise provides a unique opportunity to work collaboratively with firms to build that system-wide understanding together.”
The SWES exercise is intended to “address critical data gaps and explore potential risks and dynamics associated with private market finance”, the bank said, through testing how banks and other institutions respond to “a severe but plausible global downturn”. It will aim to illustrate how such a downturn could affect UK financial and economic stability.
However, the bank emphasised that the exercise was a system-wide analysis and “not a test of the resilience of the individual firms that will participate”.
The analysis will be carried out during 2026, with a final report expected in 2027.
FCA highlights weaknesses in private assets valuation processes
Earlier this year, the Financial Conduct Authority called for asset managers to improve the independence of private markets valuation processes following an industry review. The assessment highlighted the management of conflicts of interest and the way in which valuations are carried out during times of market disruption as areas for improvement. Read the full story.
