Should we mandate DC pension funds to invest in illiquids?

Nick Lyons will be speaking on his plans for UK DC on Monday

On Monday, I’ll be questioning Nick Lyons, Chair of Phoenix and Lord Mayor of the City of London on his plans to create a £100bn tech and pharma fund for UK DC pensions to invest in. He suggests that 5% of our DC pensions invest in a state superfund to grow our money and our economy.

It’s happened already in Australia, and it didn’t need a law to make it happen.

In this article,  I’ve been researching how Australian workplace pensions are achieving scale , starting by lookin at what happened to “Supers”  in 2022. It’s one thing to achieve scale, another to keep it in tough times.

How did the Australian Super system fare in the 2022 downturn?

Australia’s superannuation juggernaut lost little of its  momentum in  2022 with only the smallest overall reduction in fund assets. The KPMG Super Insights review, tells us  that in a year where the average UK pension pot lost 10% of its assets, Super schemes lost savers  just below  3% of their pots

With net inflows mitigating fund losses  , there was an overall  fall in funds  under management of just $1bn  from $2.8 trillion in 2021 to $2.799 trillion in 2022. That is some resilience

It was an even bright picture for the seven biggest funds, each worth more than $100 billion, which maintained their growth trajectory thanks to a run of mergers in the sector, observing the composition of the funds had changed. The KPMG report tells us

“In 2021, Australian Super was the only industry fund in the top seven – by the end of the 2022 financial year,  there were three industry funds in that top cohort, replacing one public sector fund and one retail fund. These largest seven funds now represent well over half (58 per cent) of the workplace Australian super industry”.

“After the mega funds, there are five funds of $60-100 billion, then a significant gap to the next biggest fund at $32 billion. There are seven funds between $20-32 billion and then a long line of smaller funds”. 

My conclusion is that scale leads to resilience and that where it is achieved, it creates the conditions for the kind of funds our Lord Mayor wants us to invest in. Which is why I support Nick Lyons fund, but only for funds where scale is being achieved. The smaller the Super, the less resilient they appear to be. Is UK DC ready for Nick Lyons fund?

Regulation driving change – the hoped for outcome of the VFM Framework

The DWP openly promote mergers and the rise of mega-funds. But it hasn’t happened yet. Compared with Australia we have many small funds. We are at an early stage.

The Australian regulator APRA’s push for smaller funds to merge, resulting in the rise of mega funds,  is a continuing driver of change in the super landscape. Five more significant mergers took place in the year under review and nine other funds have now made a merger or made a memorandum of announcement to merge.

Linda Elkins, KPMG national sector leader – asset & wealth management tells us in the report.

The growth in the super sector was restricted to the largest funds, mostly due to that merger activity. The Australian super sector is becoming more clearly stratified by size of funds,”

Notably, only 14 funds in the industry posted net flows above $300m; the other funds in the industry had low or negative net flows. And even among the seven biggest players  2022 results were mixed.

Who are the winners in this battle for scale?

In terms of net cashflow momentum, AustralianSuper dwarfed the rest of the industry by adding a huge $25 billion, followed by Australian Retirement Trust (ART) with the next highest net flows. That was the result of the completed merger of two of Australia’s largest superannuation funds – Sun Super and QSuper – that brought together more than two million members, creating the $230 billion ART.

The KPMG report said that after overtaking the “Self-managed fund” sector in terms of total net assets to become the largest category in 2021, industry funds enjoyed a significant six per cent jump in market share – from 31 per cent to 37 per cent.

These flows – effectively from retail to industrial scale funds, appear to be driven by member choice. People are choosing Super over managing their fund for themselves.


The numbers quoted above suggest Australians are voting with their feet , finding more value for money where there is scale.

But super funds, like any other business,  compete  among themselves to recruit and retain members, .

“To attract members and achieve organic growth funds are increasingly investing in digital capability and improving online offerings. We are also seeing a variety of member retention initiatives and funds creating smooth member journeys – often including an advice element – from accumulation phase to retirement,”

While the first stage is to engage employers and trustees, the second stage of the UK VFM project must be to engage savers in their VFM.

Tackling the risk of living too long

With Australia’s life expectancy at 84 years, unexpected longevity is a real and present risk for would-be retirees, says Melinda Howes, KPMG superannuation partner.

“There is now a critical mass of retirees with a common unmet need – dealing with longevity risk and achieving a certain income for life. APRA requires that by the end of June trustees will have undertaken an assessment of their products and strategies.”

“Consideration of longevity insurance solutions is now front of mind for many funds, given members’ desire for secure income. A number of funds have now created chief retirement officer roles, reflecting the market-wide shift in focus to retirement.”

Maintaining assets in our workplace pensions to and through retirement, is the third means for Australian Supers to grow. They are beginning to think of themselves as providing the retirement service we would call a pension.

Super’s messages for the UK

To have their enviable DC system you need

  1. Scale – mergers and the rise of the mega-funds

  2. Member acquisition and retention

  3. Retirement

Some will argue that there is a fourth requirement – mandated contributions through auto-enrolment comparable to the compulsory contributions in the Australian system. This may be desirable if you run a commercial pension fund, but we cannot rely on an extension of the AE reforms anytime soon.

I’ll be asking Nick Lyons whether we are ready for a £100bn fund.

In my view – we get there not by mandating a 5% allocation (as Nick Lyons suggests) but by creating a workplace pension  system that can invest in productive capital organically.

That means doing as Super has,  increasing scale, providing a service that makes people proud of their pension and giving people retirement options that make them want to stay invested.

That’s a lot of work, and if we aren’t prepared to put in the slog to get our funds fit for purpose, do not be surprised if we have private market investments thrust upon us.


About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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4 Responses to Should we mandate DC pension funds to invest in illiquids?

  1. Martin T says:

    If the state is to start dictating investment allocations to schemes why not simply get rid of the dispersed trustee governance model, extend the PPF mandate, and transfer all schemes to it.
    Fully professional governance ✅
    Fully compliant with desired investment strategy ✅
    Maximised investment in illiquids and UK plc ✅
    TPR, DWP and HMGov in full control ✅

  2. henry tapper says:

    Big “if” there Martin , but I do think we could get some help from PPF and Nest in accessing good stuff. TBF to Nick Lyons, I think his plan is to get insurers working with Government to get a fund seeded that can get us access to a public/private wealth fund. This is more practical than the free for all we’ve had so far- and some of this is happening already – think Nest/Cushon collaboration.

  3. henry tapper says:

    Impressed with those green ticks BTW

  4. Eugen N says:

    Why would pension funds need to fund early investments in tech and biotech? That is the job of Venture Capitalist funds of which we have plenty in the UK. What we have less and less is people coming with interest ideas and knowledge to get the investment.

    It is not the money which are missing, but ideas and antreprenors, with good ideas to become profitable, so they can get the seed investments.

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