Private market investments ‘may outperform public markets after costs’, says The Pensions Regulator in guidance published by the body today.
The guidance, designed to help pension scheme trustees consider investing in private market assets, follows recent changes to regulations that requires trustees to disclose and explain their policies on illiquid assets in the default statement of investment principles (SIP) or the scheme SIP for collective DC schemes, and the percentage of assets in the default fund(s) or for the scheme as a whole for a collective DC scheme that are allocated to certain asset classes in their annual chair’s statement.
Highlighting the greater dispersion of returns, the guidance says: “While, on average, after allowing for costs and fund fee structures, private market assets may outperform public market assets, there can be a wide dispersion of returns across individual assets and funds, within and across strategies and managers.”
The private markets guidance emphasises that with the right advice and effective governance, private market assets can play a valuable part in a diversified portfolio that aims to improve and protect saver benefits.
TPR’s guidance follows on from the Government’s Mansion House reforms, which are designed to enable the financial services sector to unlock capital for UK industries and increase returns for savers while supporting growth across the wider economy.
TPR says those schemes or providers who do not have the skills or resource to explore a more diversified portfolio should consider changing their governance model or consolidating.
Minister for pensions, Paul Maynard says: “I welcome TPR’s guidance encouraging pension schemes to consider investing in private markets. Considering a full range of investment options can help diversify portfolios and improve outcomes for savers.
“The guidance bolsters our ambitious plans to improve retirement outcomes and drive economic growth in line with our Mansion House reforms.”
Interim director of regulatory policy, analysis and advice Louise Davey says innovation in the investment management market and the launch of new fund structures, like the Long Term Asset Fund, is providing more opportunities for defined contribution (DC) schemes to invest in private market assets.
She says: “Our focus is on driving up value for pension savers. For DC schemes, we want to see a shift in mindset from cost to value. Our guidance helps trustees consider how best to do this.
“Investing in a wider range of assets can help boost the value of DC pots. While private market investments generally carry higher costs, they can have a positive net impact on the value delivered. With appropriate advice, private market assets can play a key part in a diversified portfolio that aims to deliver better outcomes for savers.
“As the defined benefit universe develops and new models evolve involving, for example, consolidation or capital backed funding arrangements and run-off models to generate additional surplus, further opportunities for increased investment in private market investments are likely to arise.
“It’s not our job to tell trustees how to invest people’s pensions. But it is our job to make sure they focus squarely on delivering value from investments and have the right skills and expertise to consider all asset classes.
“We support innovation that benefits savers. Trustees who don’t have the scale or governance to achieve these rewards should consider consolidating or changing their governance model.”
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