The Pensions Regulator has said a combination of factors are currently limiting some pension schemes’ appetite for private market assets. TPR intends to challenge trustees on their investment strategy and governance capabilities through supervisory engagement.

On Monday, the regulator published analysis of the issues that are holding pension fund decision makers back when considering private market exposure. Based on engagement with more than 40 private sector stakeholders, it identified possible barriers ranging from concerns about fiduciary duty, opacity and high fees, to an alleged knowledge gap among trustees and consultants. 

Policy and regulatory uncertainty, along with a lack of suitable opportunities, were also cited. However, the regulator acknowledged that most large defined contribution schemes and DC master trusts have already invested or are intending to invest.

“The need to invest in line with fiduciary duty was a consistent theme in our engagements,” the report states. “Ongoing concerns around fees, transparency and elements of fund governance were a recurring theme among those we engaged with,” it adds. 

The analysis also alleges a skills gap, including among consultants: “There continues to be a lack of specialist skills and resources across the DC consulting industry in private market assets compared to public market assets and further development is needed to support the continued growth in private investments.” 

The government is keenly watching progress on DC schemes’ Mansion House commitment of raising exposure to 10% with half of this benefitting the UK.   

"Pensions are a huge source of potential investment in this country, and we want schemes to be able to back UK growth as well as deliver good outcomes for their members. This research moves us closer to understanding the barriers holding schemes back, helping us work with industry to unlock investment that supports a stronger economy and better retirements for savers,” said pensions minister Torsten Bell.  

TPR’s executive director of market oversight, Ben Gunnee, added: "Pension schemes want to invest in private markets, but many schemes are currently experiencing  practical barriers that limit their opportunity for investment. Our research can help government and industry understand what's getting in the way and where action could unlock investment that benefits members and the wider economy.”  

The regulator is now encouraging trustees to take a series of actions because of what it cautiously calls “the potential value add and improvement in member outcomes that a well-diversified portfolio, including private market assets, may have the potential to offer”. 

As DC schemes are expected to reach £1tn in assets under management by 2036, these actions include thinking about the scheme’s long-term future and internal structure, reviewing the current level of board experience and bandwidth, and strengthening investment risk and governance controls.  

TPR is also telling schemes to review their adviser support, engage with industry and explore a range of implementation options. Currently, most schemes gain exposure through pooled funds that contain a mix of private market assets, with more than 30 Long-Term Asset Funds now on the market.  

Meanwhile, TPR’s analysis found that closed defined benefit schemes are generally unwilling to rerisk and lock up liquidity, and that open DB schemes tend to have significant allocations already in place.