Some defined benefit pension schemes are reconsidering private markets allocations as they explore running on rather than pursuing buyout, potentially creating opportunities to acquire assets from schemes seeking liquidity, according to Schroders.
A number of defined benefit (DB) pension schemes are beginning to revisit private markets investments after years of reducing their exposure to illiquid assets, according to Schroders.
Ian Biscoe, head of DB and LGPS at Schroders, said the emergence of alternative endgame strategies to buyout including running on was prompting some schemes to reassess their appetite for growth assets, including illiquid investments.
He said: “I don’t think this is the case that all of a sudden everybody’s going to be piling back into growth assets, but we might just see some schemes starting to re-risk.”
Many DB schemes have already reduced their holdings of illiquid investments, as well as leverage in their liability-driven investment (LDI) portfolios, creating scope to reconsider their exposure to private markets.
Schemes could opt for semi-liquid options or commit to illiquid funds. “We have seen, in a small number of instances, schemes having appetite for picking up long-term private asset allocations again,” Biscoe said.
Private markets investments can complicate buyouts because their long lock-up periods make them difficult to sell, while insurers may be unwilling to accept them as part of a transfer of assets, forcing schemes to secure liquidity before completing a transaction.
Many closed DB schemes are still pursuing buyout and seeking to dispose of illiquid holdings – and this process could create attractive opportunities for re-risking schemes to acquire investments.
“There are still a lot of corporate DB schemes who are looking to exit private assets because they do want to go to buy-in,” he said. “So there’s some good buying opportunities for those schemes that are prepared to take on some illiquidity again.”
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Maintaining flexibility
However, the extent of any renewed investment will depend on how firmly schemes commit to running on, with larger schemes potentially better placed to make long-term allocations because of their greater governance resources.
Biscoe emphasised that running on did not necessarily mean retaining a scheme indefinitely. Many trustees and sponsors would want to preserve the option of eventually transferring liabilities to an insurer, limiting their willingness to lock up capital for extended periods.
This could favour semi-liquid private markets structures, including multi-asset solutions, alongside strategies such as asset-backed finance, rather than long-term commitments to private equity or infrastructure equity.
“We’ve seen some schemes allocating towards our semi-liquid type structures,” he said, adding that smaller and medium-sized schemes were more likely to favour multi-private asset solutions, while larger investors could select individual asset classes.
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Rachel Harris, head of UK Institutional at Schroders, noted that managing liquidity becomes more complicated when pension portfolios allocate to a broader range of asset classes. “As portfolios become more diverse, liquidity management has to be much more important,” she said. “Historically, liquidity was just one of those things that existed.”
Investors increasingly need to consider liquidity across their entire portfolios, making it “a strategic piece rather than a constraint”.
Risk management would remain central to these decisions. “You’re going to need to think about it much more from a total portfolio allocation standpoint,” she added.
Schemes considering additional growth exposure would need sufficient funding buffers and liquidity to avoid undermining the progress made in reducing risk.
Biscoe also suggested that 2027 could prove an important year for DB investment strategies as trustees and sponsors move beyond evaluating their endgame options towards implementing them.