New guidance on investing in private markets has been issued by the Pensions Regulator, to encourage trustees to consider assets in these markets, as the government is steaming ahead with its productive finance agenda.  

Private markets have grown rapidly in recent years, with total private markets assets under management reaching $11.7tn (£9.2tn) in June 2022, according to consultancy McKinsey. Against the roughly $125tn in public markets, this is comparatively small, but the government appears to view private markets as a driver for economic growth and is keen to have pension funds allocated to the space. 

TPR’s guidance has also been issued as a result of the government’s push to channel pensions money into UK ‘productive finance’ assets. 

Pensions minister Paul Maynard welcomed the guidance. “Considering a full range of investment options can help diversify portfolios and improve outcomes for savers,” he said. “The guidance bolsters our ambitious plans to improve retirement outcomes and drive economic growth in line with our Mansion House reforms.” 

Trustees have a duty to consider “the full range of investment options”, said the regulator, and asks that they should have an “appropriate level of knowledge and understanding” so they can look at private markets with their advisers and set objectives for these in relation to private markets. The guidance cites six opportunities of investing, such as potential higher returns, and three risks, including illiquidity. 

TPR’s interim director of regulatory policy, analysis and advice, Louise Davey, said: “It's not our job to tell trustees how to invest people's pensions. But it is our job to make sure they focus squarely on delivering value from investments and have the right skills and expertise to consider all asset classes.” 

For DC schemes, she said the regulator wants to see “a shift in mindset from cost to value”, with the guidance supporting this. 

Defined benefit schemes are also on the radar, even as most are closed to future accrual and despite the liquidity crunch for DB schemes in 2022. 

“As the defined benefit universe develops and new models evolve involving, for example, consolidation or capital backed funding arrangements and run-off models to generate additional surplus, further opportunities for increased investment in private market investments are likely to arise,” said Davey.  

The regulator said that the guidance “may also be of interest to administering authorities in the Local Government Pension Scheme”, which however have statutory guidance on LGPS investments from the Department for Levelling Up, Housing and Communities.   

Research by mallowstreet found that many schemes have for some time been looking to private markets, partly because of volatility in public markets. In a 2022 survey, close to a third (29%) said they would increase their infrastructure equity and private equity allocations, while 21% planned to grow their private credit exposure. However, pension funds also cited problems with access due to the assets’ complexity, illiquidity and higher investment costs. 

Will you consider private market investments this year?