Private markets can help support greater pensions engagement among DC members

Legal & General (‘L&G’) has today published its annual Defined Contribution (‘DC’) member research, which finds that the integration of private market assets such as affordable housing, clean energy infrastructure and innovative tech companies can help to encourage UK savers to engage with and contribute more to their pensions.

L&G’s research shows that these areas are also a priority at a scheme level, with DC asset allocation professionals placing emphasis on diversification and capital growth as they seek to increase returns and long-term outcomes for members.

Private markets hold potential to boost engagement and contributions

The latest findings provide encouragement that private markets could help in boosting the UK’s level of pension engagement, which continues to remain low. The latest research from L&G finds over half (58%) of DC savers do not know that their pension money can be used to change the way companies work and the society we live in.

Nearly three-quarters (68%) of DC savers agree they would feel more engaged with their pension if it was invested in assets like affordable housing, helping to address the housing shortage in the UK. 63% of members agreed that if their pension was helping to drive the energy transition by investing in clean energy, they’d feel more engaged, while 57% said that allocations to spin-out businesses from university science and technology departments would boost their engagement.

Building on last year’s results, today’s research supports the view that people’s engagement with their pension is linked to the tangible impact they feel their contributions are making on society.

The inclusion of private markets in pension portfolios could not only drive engagement, but potentially higher contributions too. Over half (55% and 52% respectively) of respondents agreed that they would be inclined to pay more into their pension if it was invested in affordable housing or for allocations to clean energy, with 49% saying the same for innovative start-ups.

Alongside the societal benefits, respondents also recognise the potential enhanced returns private markets can offer – 60% of respondents believe investing in affordable housing could result in better returns for their portfolio, while 58% of savers believe that investing in clean energy has the potential to offer better returns.

DC schemes prioritising environmental and social outcomes over next two years

In further research, L&G has also polled DC scheme decision makers about their attitudes to the future of their private market allocations.

Just as members report a preference for their pensions to invest in environmental and socially orientated assets, DC schemes are also prioritising these outcomes in their private market investments, with 80% saying this trend is set to accelerate over the next two years. The climate transition, digital transformation & AI and healthcare hold most appeal for DC schemes when considering thematic opportunities in private markets.

When focused on environmental outcomes, schemes overwhelmingly say clean, renewable energy infrastructure is their biggest priority (87%), followed by transmission assets (47%). From a social perspective, half (50%) of schemes believe social issues in private market investments will enhance long-term returns, with 43% prioritising allocations to affordable housing.

Savers appreciate role of private markets at right time in investment journey

While aware of the positive societal benefits and potentially enhanced returns, DC savers are also mindful of the broader considerations that need to be factored into investing in private markets. Of the members polled, 82% were concerned around there being potentially more risk of an investment loss compared with traditional investments. There are varying risk and return profiles for different private markets asset classes – affordable housing, for example, offers high potential risk adjusted returns and a relatively low risk profile compared with other assets, due to long-term societal demand for new homes in the UK. These findings suggest that there is therefore an important role for member education around how a diversified pool of private market investments can aim to fit into a DC portfolio.

Notably, these concerns were higher among older generations, with 73% of respondents aged 50+ worried that investing some of their pension money in assets that might not be quickly sold could carry the risk that they will not be able to easily access their pension money when the time comes. The findings indicate a view among members that wider exposure to private markets might be better suited for those in the earlier growth stages of a pension, acknowledging the importance of integrating private markets with varying levels of exposure at different stages of their retirement journey, as well as diversifying appropriately.

The research highlights that Millennials and Gen Zs are particularly positive about the integration of private markets into their pension portfolios. 74% of respondents in these categories would feel more positive about their pension if their funds were being used to help support affordable housing schemes, given the challenges facing these generations in getting onto the housing ladder. 81% of Generation Z would be willing to pay more for a pension which was helping to drive forward technology and innovation in the UK, compared with 51% of Baby Boomers.

These results suggest that private markets could play an important role in delivering for DC savers that are just starting to enter the workplace and thinking about a pension for the first time.

L&G launched its Private Markets Access Fund in July 2024. The fund is designed to offer DC schemes a single point of access to a diversified portfolio of private market assets, including affordable housing, clean power infrastructure and university spin-outs. The fund formed a key part of L&G’s strategic update in June, in which the Group announced its intention to scale up its £52 billion Private Markets platform and target growth in its Workplace Defined Contribution pensions business. This includes opening up access to existing strategies such as the L&G Clean Power (Europe) Fund and the L&G Build to Rent Fund, as well as new strategies such as Affordable Housing, to meet DC pension client demand for private markets exposure.