Might your pension pot be missing out on an increasingly important asset class?

With defined contribution (“DC”) pension schemes now the norm, investors carry greater responsibility than ever to grow their own pension pot. In Britain, pension funds have long been less exposed to private markets than those in government want them to be, and under-exposed compared to pension funds elsewhere in the world.

At the end of last year, the average UK workplace pension scheme had just 3% of assets invested in private equity, infrastructure, private debt and venture capital.

By contrast, many of the world’s top pension schemes, endowments and sovereign wealth funds incorporate a far greater allocation to private assets.

In Canada, a majority of the top public pension schemes, known as the Maple 8, allocate more than 50% of their respective portfolios to the private markets.

Additionally, AustralianSuper, the country’s largest default superannuation fund, has allocated 28% of its balanced portfolio to private markets. Similarly, rival superfund Hostplus targets a 40% allocation to these alternative assets.

Private markets are typically less liquid, more complex and higher risk than listed investments. However, they can offer diversification benefits and, in the past, have contributed to the strong long-term performance of some pension funds. The question is why UK default pension schemes have historically allocated so little to them.

In the UK, over 80% of workplace pension assets have been funnelled into default investment strategies.

These default funds must abide by strict regulations that cap the amount these funds can pay for fund management services to 0.75%, including all charges, which limits the amount these funds can invest in private markets, where management fees are typically higher.

The result is the average allocation to private assets amongst the largest UK DC schemes is now just shy of 5%, having risen from 3% a year earlier.

This means investors may have less exposure to these “patient capital” asset classes, which have historically generated strong returns although past performance is not a guide to the future. In the 20 years to 2025, Private Equity funds have generated a 13% annual return compared to c.7% for global listed equities.

To address calls for greater private markets exposure, last year the government set out new guidance within the Mansion House Accord, encouraging the largest DC pension providers to voluntarily sign up to a target of investing 10% of their default funds in private markets by 2030. However, even if this target is achieved, this could still represent a meaningfully lower allocation than those seen in some of the largest DC pension schemes globally.

In addition, any allocation within a default fund will continue to be determined by the pension provider and applied across large groups of members, meaning it may not reflect every investor's individual objectives, preferences or risk appetite.

The growth of semi-liquid private markets funds

For some investors, having the ability to tailor their private markets exposure through a personal pension may therefore be attractive. Until recently, this has generally not been possible, as traditional private markets funds were designed for institutional investors, including pension schemes, and ultra-high-net-worth individuals, often requiring substantial minimum investments and long lock-up periods.

More recently, the growth of semi-liquid private markets funds has helped broaden access to the asset class. Unlike traditional closed-ended private markets funds, these evergreen vehicles accept new capital and may offer periodic dealing opportunities, often monthly or quarterly. Restrictions can still apply, and a long-term investment horizon remains important.

However, increased accessibility does not remove the risks and considerations associated with investing in private markets. These investments are not suitable for everyone. While pension schemes can typically commit capital over many years, individuals should carefully consider their own liquidity needs, as private markets investments are generally less liquid than publicly traded investments and may involve additional complexity and risk.