Private markets have won a place in DC portfolios. Now schemes face the more difficult challenge of deploying capital at scale while balancing returns, fees, governance and growing political expectations.
Private markets may have won the argument for inclusion in defined contribution (DC) pension schemes, but speakers at PMP’s Defined Contribution Forum suggested that the industry’s biggest challenges still lie ahead. As allocations begin to scale, attention is shifting from access and adoption towards deployment, manager selection, fees and the UK’s ability to generate enough investable opportunities to absorb growing pools of pension capital.
While much of the industry remains focused on the Mansion House Accord’s commitment to allocate at least 10% of default funds to private markets by 2030, several speakers suggested that figure may prove to be only a starting point.
For Callum Stewart, DC investment partner at XPS Group, the industry should already be looking beyond current targets. He argued that by the 2040s, the UK DC market could exceed £2 trillion in assets, with private markets allocations up to 30% becoming commonplace. “We’re talking about hundreds of billions in commitments eventually,” he said. “The focus now is very much on the what [to allocate to] and the how.”
That shift was echoed throughout the Forum’s opening sessions. Chair Helyne Slade, director and head of DC investment at Isio, noted that private markets had moved from being a niche topic to “a clear industry priority”.
That said, she cautioned against treating private markets as an end in themselves. “Success isn’t about increasing allocations, it’s about building solutions that are appropriate for DC, scalable, robust, fair for members and ultimately executed well,” she said. “Private markets can have an important role to play, but they’re not a silver bullet.”
[L-R Helyne Slade, Jake van Koevering, Callum Stewart and Ben Lewis]
James Wall, head of UK DC business development at Schroders, argued that the market has undergone a significant transformation over the past three years. He pointed to the launch of the first long-term asset funds and the signing of the Mansion House Compact in 2023 as a pivotal moment for the sector. “It certainly feels like in that window… there was a lot of things converging and that’s really catalysed the transformation we’ve seen since,” he said.
Today there are 27 authorised LTAFs and, according to research conducted by Schroders and Longview Networks, 69% of schemes planning private markets allocations expect to access them through the structure. Yet Wall argued that the next phase will be more challenging. “The next three years are not going to just be about adoption – they’re going to be about execution as well.”
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Execution emerged as the central theme of the discussion. Several speakers argued that the real risk facing the market is not a lack of appetite for private markets, but implementation in a regulatorily constrained market. As allocations increase, schemes will face growing scrutiny over whether they are deploying capital effectively, selecting the right managers and delivering the outcomes members have been promised.
Stewart framed the challenge through what he described as an ‘ACE’ framework: ambition, credibility and expertise. “There’s no point doing this unless we think we can actively improve outcomes in a material way,” he said. Schemes need credible deployment plans and access to specialist expertise at every stage of the value chain.
The importance of manager selection was a recurring theme throughout the event, with several speakers warning that return dispersion in private markets remains substantial.
Ben Lewis, head of investment proposition at Mercer, argued that access to the strongest managers would become increasingly important as allocations scale. “The split between the best and worst [managers] is enormous in private markets,” he said. For Mercer, that has reinforced the importance of maintaining access to a broad global opportunity set and building strategic partnerships capable of sourcing attractive investments across multiple markets and fund types.
Jake van Koevering, partner in private equity solutions at Morgan Stanley Investment Management, made a similar point from a private equity perspective. He argued that specialist expertise remains one of the strongest indicators of success. “We’re looking for a certain expertise, a certain specialisation,” he said.
In the lower mid-market, where Morgan Stanley focuses much of its activity, manager selection can have a significant impact on outcomes. “The top quartile manager there has the potential to generate well north of 20% returns,” he said.
Managers with deep sector knowledge, operational capabilities and differentiated sourcing networks had consistently delivered stronger performance, he said. “Having that focus, that specialisation… time and time again, we’ve seen them deliver alpha and better outcomes.”
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The challenge is compounded by the fact that many private markets programmes remain in the early stages of deployment. Wall noted that while private equity often represents the largest target allocation within diversified private markets portfolios, building those allocations takes time. Vintage diversification, manager selection and the need for disciplined pacing all place constraints on deployment.
The risk, he suggested, is that schemes come under pressure to meet allocation targets too quickly. “The test is going to be whether schemes stay disciplined on pacing, or if there going to be pressure to get to target that leads to suboptimal deployment decisions.”
While speakers were broadly optimistic about the global opportunity set, there was less confidence when the discussion turned to the UK’s ability to absorb the volume of capital policymakers hope DC schemes will eventually deploy.
Stewart pointed to the expectation stemming from the Mansion House Accord that the Government would help create a pipeline of investable opportunities, but questioned how much progress had been made.
[James Wall]
“One of the enabling requirements of the Mansion House Accord was that the UK government would set out a very clear strategic plan as to how it will provide investable at scale opportunities for pension funds in the UK,” he said. “I’ve not really seen that yet.”
His concern did not extend to a shortage of private markets opportunities globally. “The global market is vast,” he added.
Lewis expressed a similar view, arguing that schemes should think in terms of a global toolkit rather than narrowly defined domestic allocations. “If you’re thinking about a very narrow market geographically or in terms of asset classes, then the opportunity set looks pretty narrow. As pension providers, we should have a global toolkit.”
That creates a potential tension within the Mansion House agenda. The industry appears increasingly comfortable allocating to private markets, but less certain about whether enough attractive opportunities exist in the UK to absorb the scale of capital that could eventually emerge from DC schemes.
Lewis pointed to areas such as UK venture capital as examples of markets that may align with government objectives but noted these remain relatively small in capacity.
The speakers also highlighted the growing tension between private markets ambitions and the cost-sensitive nature of the DC market. Lewis argued that greater private markets exposure would inevitably lead to higher costs. “More private markets means that DC fees across the industry will need to increase,” he said. “That’s a fact of life.” He argued that providers would need to demonstrate clearly why higher fees were justified and how they translated into better outcomes for members.
Despite the challenges, Lewis remained optimistic about the direction of travel and ability to scale. “We have the ‘acorns in the ground’, but we now need to make sure that they can grow into oak trees in the coming years.”
Stewart suggested that some aspects of the current regulatory framework may ultimately constrain innovation, arguing that disclosure requirements and charging rules can prevent otherwise attractive opportunities from being used within DC arrangements. “The charge cap mechanism itself is potentially starting to limit innovation and progress,” he said. “I’d get rid of the charge cap.”
The discussions suggest that private markets have largely moved beyond the adoption phase within DC. The bigger questions now concern execution, governance and scale. As allocations grow, schemes will increasingly be judged on whether those allocations improve member outcomes.