A regular briefing for the alternative asset management industry.
The benefits of investing in private funds have always been spread widely. The biggest contributors to the fund raisings of European private equity funds are pension funds and insurance companies – whose ultimate beneficiaries are millions of individual savers. When private equity funds perform well, those savers are better off. And there is plenty of evidence that, over the last two decades, European private equity has performed very well.
But the way in which individuals in the UK save for their retirement is changing rapidly, and policymakers are looking for ways to make sure that the next generation of retirees do not miss out on the return and diversification benefits that private markets have to offer. An important step forward came last week, when an industry-led, government sponsored working group issued a set of recommendations and a roadmap, which could have a significant impact on policy.
The change in savings habits is hugely important. As is well-known, workplace "defined benefit" pension schemes – where, broadly speaking, the employer makes a commitment to provide pensioners with a certain level of future income – are being rapidly replaced by workplace "defined contribution" (DC) schemes. In these DC schemes, the individual takes the investment risk, but does not usually take active investment decisions. As this graph shows, this move towards DC schemes has been dramatic: by 2030, the total assets in UK DC schemes is expected to exceed £1 trillion.
The trustees of DC schemes are responsible for putting in place the investment options and, critically, for selecting the scheme's default funds. The choice of default funds is vital because members overwhelmingly invest in these funds, rather than making an active decision to invest elsewhere. But these default funds tend to allocate far less to private equity and private credit than traditional defined benefit schemes, or than the DC schemes in some other countries.
Last week's report of the Productive Finance Working Group – jointly chaired by the Treasury, the Financial Conduct Authority (FCA) and the Bank of England – strongly endorses the case for dismantling barriers to investment by retail savers, particularly by the trustees of DC schemes. The working group points to evidence that private equity consistently outperforms the public markets and urges trustees to consider increasing allocations.
This is not only a problem for the next generation of retirees, but also for the economy. So-called "patient capital" – investment in long term, illiquid assets – has been championed by the government as a source of funding for innovative businesses and much-needed infrastructure. Policymakers are therefore keen to see more allocation to illiquid assets from DC schemes.
...Last week's report of the Productive Finance Working Group strongly endorses the case for dismantling barriers to investment by retail savers, particularly by the trustees of DC schemes...