TPT Investment Management investment director sets out his thinking on making allocations to meet government objectives – and do best by members
Defined contribution (DC) pension schemes are being called upon to back UK growth, but many are still working out how to square this, currently voluntary, commitment with their fiduciary duty to members. Following the Mansion House Accord, schemes are expected to meet a target of 10% allocation to private markets – of which half should be invested in the UK.
At TPTIM, we support the objective of aligning with government policy where it is consistent with delivering strong, risk-adjusted returns for members. But alignment cannot come at any cost. The practical realities of DC, such as fee constraints and liquidity needs, mean that not all private market asset classes are going to be equally suitable.
Take venture capital, often held up as a key engine of UK growth, particularly in areas like biotech. The narrative is compelling, and institutions have highlighted the scale of opportunity. However, venture capital in its current form remains prohibitively expensive in a DC context. The charge cap, while often described as non-binding in practice, still exerts a powerful influence on the commercial realities of managing DC schemes.
Historically, the industry has competed on how far below the cap it can operate, creating a structural barrier to higher-cost strategies. Even where there is theoretical headroom, the fee structures and return dispersion in venture capital make it, in our view, difficult to find a place for it in default DC allocations.
By contrast, private credit presents a much more compelling case. It offers a number of attractive features, including strong cashflow generation, lower volatility and, crucially, greater flexibility on fees. Management fees can be negotiated, and flat-fee structures are more common.
In this context, we have already begun selectively allocating to private credit. Importantly, private credit can be tailored across the risk-return spectrum. As members approach retirement and move into decumulation, allocations can shift from higher-return strategies suitable for younger members in accumulation toward lower-risk, income-generating exposures, supporting more stable outcomes.
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That said, private credit does not naturally solve the ‘UK allocation’ challenge. Direct lending markets remain dominated by the US and continental Europe, with the UK representing a relatively small share. If the objective is to increase domestic investment, we may need to look elsewhere.
Commercial real estate is one such area. The UK market offers tangible opportunities, and the asset class aligns well with DC requirements. It is relatively low-cost, avoids performance fees and allows for smaller ticket investments when compared with infrastructure which allows for commitments to be built over time.
At TPTIM, we already have some exposure through our defined benefit (DB) portfolio, including direct ownership of UK assets such as warehouses, car parks and hotels. Real estate is particularly well suited to the accumulation phase, where illiquidity is less of a constraint.
Infrastructure is often cited as the cornerstone of productive finance, and we have substantial experience here within our DB portfolio. We have significant allocations to the UK across both infrastructure equity and debt, which includes holdings such as Gatwick Airport and Thames Tideway and a range of construction projects across the renewables sector.
However, infrastructure investment is not without its challenges. There remains a degree of misalignment between national policy ambitions and local decision-making, as seen in the ongoing constraints around Gatwick’s expansion.
More broadly, greenfield infrastructure projects tend to be more expensive, long dated and highly sensitive to policy support. These characteristics can sit uneasily with DC constraints, particularly around fees and the timing of capital deployment. The mismatch between when fees are paid and when assets are drawn down is a persistent issue under the charge cap framework, with the inability to pay fees on committed but undrawn capital often ruling out investment with some of the highest quality infrastructure managers.
There’s also the issue of scale. Often, infrastructure projects need billions in commitments. One master trust can’t do this on their own, so how do you bring them together? Attempts to aggregate demand have historically struggled to gain traction. Without a more coordinated approach, there is a risk that ambition outpaces execution.
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One way forward is to treat private markets as a global mandate, with UK assets forming a component of that – rather than acting as a constraint. This reflects the reality of opportunity sets and ensures that member outcomes remain the primary focus. In some cases, UK opportunities such as solar infrastructure have become so crowded that expected returns are now relatively low. Selectivity is essential.
Historically, DC has been shaped by the introduction of the charge cap in 2015, which triggered a race to the bottom on costs, often at the expense of delivering the best member outcomes. Unlike DB, where investment strategies have been able to focus on net returns, in DC the priority has always been cost first, returns second. Only more recently in DC, with government and regulator-led initiatives such as Value for Money, has there been a renewed emphasis on value and outcomes.
Encouragingly, we are beginning to see greater alignment between DB and DC, particularly as schemes scale. Larger master trusts can leverage their size to negotiate better terms with investment managers and access a broader range of opportunities. There are clear synergies in bringing DB and DC capabilities together under a single platform, using aggregate scale to improve outcomes across both.
The Government’s objectives are directionally right. Increasing investment in UK productive assets has the potential to support economic growth while delivering long-term benefits for pension savers. But the path to achieving this is nuanced. It requires a pragmatic approach to asset allocation, a clear-eyed view of costs and constraints, and a relentless focus on what is in members’ best interests.
If we get that balance right, alignment with policy will follow naturally. If we don’t, no amount of top-down targets will deliver the outcomes we all want to see.
By Peter Smith is the investment Director of TPT Investment Management (TPTIM)