UK assets make up £1.4tn of a combined £3.2tn held by pension funds, while just under half of assets is in equities and alternatives, new research published on Wednesday has found. The effect of government reforms on asset allocation is expected to become apparent in future data studies.

The Pensions Policy Institute’s report, ‘Pension scheme assets – how is asset allocation changing and why?’ dissects pension funds’ asset allocation in 2024. The report sheds light on investment decisions against a backdrop of government initiatives to increase investment in private markets and UK assets, including the Mansion House Accord’s voluntary 10% private markets commitments, a planned reserve power to mandate private market investment for defined contribution schemes, and an expectation on Local Government Pension Scheme funds to allocate to their local area.    

The PPI identified six key themes around pension investments emerging from the data: a search for diversification away from public and towards private markets; scale; the role of social impact in decision making; securing the endgame for closed defined benefit schemes; the uncertainty of Local Government Pension Scheme reforms; and geopolitical uncertainty. The 2024 data do not yet fully reveal any significant impact of government reforms, it notes, but predicts that this will happen in time.    

“It’s clear that the way in which UK pensions are invested is undergoing a period of transition, with assets moving in a number of directions, but principally away from DB towards annuities and DC. This is having an important effect on asset allocation with less demand for gilts and, gradually, more demand for diversity in the mix of assets held,” explained PPI deputy director Suzy Morrissey.   

While the shift to private markets is underway particularly in public sector DB, it will take some time to see the effect clearly in workplace defined contribution schemes, she added.   

“Schemes and providers tell us that for allocations to UK private assets to take off, the pipeline of investment opportunities must be visible, and the burden of UK planning rules must be lifted,” said Morrissey. “Overriding all of this are the responsibilities of fiduciary and consumer duties.”  

 

In an environment increasingly shaped by politically motivated narratives, the report found that a staggering £1.4tn is already in UK assets, the bulk of this in the form of gilts issued by the UK government to meet its spending needs. Nearly half of pension investments (44%) are held in equities and alternatives – including 34% in equities and just 10% in alternatives. A considerable 12% is held as cash, much of it in DC schemes, raising questions about how appropriate these assets are for the typically younger DC population.   

PPI estimates that 6% of the £3.2tn pensions money is currently invested in UK productive assets, in which it includes private equity, property and other alternatives, held mainly by defined benefit schemes. If UK corporate bonds and UK listed equity are included in the ‘productive’ definition, the proportion rises to 20%, with annuity providers leading the way.    

While private sector DB – where most schemes are closed to new entrants or accrual – has seen a significant shift towards bonds and away from equities and alternatives, the PPI found public sector DB also saw a rise in bond holdings, although listed equities and alternatives still account for more than 70% of assets held by those schemes.   

In the private space, the gradual transfer of DB liabilities to pension annuities – managed by insurers – means a transfer of pension assets towards corporate bonds, as well as to alternatives such as property and infrastructure, according to the PPI. Meanwhile, much of the assets in occupational DC schemes are held in listed equities, particularly in the growth phase of default funds, with alternatives representing a very small proportion.