Private markets – pension’s friend or foe?

Two articles appeared in the FT over the bank holiday weekend that show just how fractured pension investment strategy over private markets is becoming.



In the one, David Fairs, the Pension Regulator’s policy Director expresses concern that small defined benefit pension schemes are using investments in private markets as a means to keep afloat and risking the scheme’s capacity to liquidate , if called upon to do so. He is criticized by BT Pension Scheme’s CEO Morten Nillson and the USS for creating unintended consequences for larger schemes for whom private markets are underpinning scheme solvency.


In another, Andrew Warwick-Thompson criticises what he sees as undue pressure on trustees to invest more into precisely the same assets on behalf of DC members. Meanwhile the DWP continue to press for scheme consolidation into schemes like the Scottish Widows master trust (of which Warwick-Thompson is Trustee Chair) to improve member outcomes.

Ironically, scaling up is seen as a way by the the DWP (which regulates through the Pensions Regulator) to get more of our pension savings into illiquid private markets.

The public have a right to feel confused. Why should it be right for pension savers to take the risks and rewards of these markets but wrong for small DB schemes? And if tPR are worried about the liquidity of small DB pension plans, why are big DB plans claiming they will be caught up by a cap imposed by TPR?

A mess from meddling?

It would be tempting to blame this as the result of Government meddling in areas where it should be trustees and trustees alone who have discretion over the investment strategy.

But the issues here are so complex that like a puppeteer , Government is finding that the puppet strings are getting caught up with one another. Large schemes like USS and BT  have long time horizons as they  have to manage their own risks (with inadequate support from sponsors to buy-out). Small DB schemes , of which there are too many (in everyone’s view) are finding that they can invest in private markets who are promising returns that are well above the risk-free rate , allowing them to appear solvent when- in tPR’s view they are papering over the cracks. With the implementation of the DB funding code receding over the horizon, it would seem that it is the private markets promises of future returns, not fundamental valuations , that are the regulator’s concerns for small DB.

But if this lack of transparency is of concern to TPR for small schemes, why is it not a concern for DC schemes?

Warwick-Thompson seems to be at odds with Guy Opperman who in the foreword to a recent consultation  told DC schemes

“Never has there been a better or more important time for a defined contribution pension scheme to consider innovating their investment strategy. Investment in emerging sectors like green infrastructure or innovative British companies fits well with the long-term horizons of DC schemes, and are vital to helping sustain employment, our communities and the environment.”

Warwick-Thompson’s response is blunt

“The government appears to be pushing trustees to invest ‘patriotically’ in order to help the UK economy to recover from the Covid pandemic………………..

That objective conflicts with the fiduciary duties of trustees to consider all investable opportunities and choose those which they think will be in the best interests of securing their members’ retirement benefits.”

Where is the prospective pensioner in all this?

Totally confused?

Well I think I can just about work out what all the different parties are getting at but I am far from certain that there is any coherent message coming from either side over what is in the member’s interest, what is in the pension scheme’s sponsor’s interest and to what extent regulators , sponsors and trustees are working together towards a common goal.

The PLSA are arguing that the needs of DB and DC pension schemes are different because of the pressures on DC schemes to meet charge caps and provide daily liquidity, the Government are saying that only matters if you are a small DC scheme.

The Pensions Regulator imply that sponsors of small DB schemes are using promised returns from the private markets to make their schemes look solvent which keeps the sponsor’s cash-flow retirements low, but TPR see 50% allocations to the private markets as a threat to the scheme’s capacity to meet its obligations and a worry for the PPF which might inherit a pile of unwanted assets of the Woodford variety.

Time for a clear statement from the top

With all these conflicting messages about the use of private markets to meet long-term pension obligations, we have to add into the mix the needs of all parties to reduce the negative impact of investments on the sustainability of the planet, to improve the quality of life of UK plc and increase the standard of governance of the investments undertaken.

If , as Opperman is saying, private markets can meet ESG goals, then why do DB Trustees press for freedom to agree more violently and DC trustees push back on committing much smaller allocations for their members.

It is confusing to the general public and we do need pension schemes, regulators and Government to be singing from the same hymn sheet.

Clarity and transparency are aspects of investment strategy which pay dividends and that starts from the top.


About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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