Master trust providers plan to back the government’s push for greater investment in productive finance with “outsized” domestic allocations, according to research.
With many defined contribution (DC) master trusts increasing their allocations to illiquid assets, research by consultancy group Isio found that the majority plan to invest between 21% and 30% of their illiquid allocations domestically.
A third plan to allocate at least 40% to UK assets, Isio reported.
George Fowler, partner at Isio, said the shift reflected both the influence of government initiatives, such as the 2023 and 2024 Mansion House reforms, and a broader focus on UK infrastructure and real estate as attractive long-term investment opportunities.
“Our research shows a clear shift towards greater investment in illiquid assets within DC master trusts, albeit with significant variation in both the size of allocation and whether one or two defaults are being offered,” Fowler explained.
“Within the illiquids allocation, we are also seeing a sizeable allocation to the UK, albeit this is more focused on UK infrastructure and property than venture capital to date.
“Although we believe allocating to illiquid assets has the potential to improve member outcomes, this will only happen with effective implementation, with approach to ramping up, managing liquidity and the appropriate balance between internal and external management being key areas to watch out for.”
Analysis by Isio, which investigated the use of illiquid assets among 15 major providers of DC master trusts, found that specific allocations to UK venture capital are rare, with most providers currently considering this as part of a broader private equity mandate.
Isio’s research also found that target allocations vary between less than 5% at one end of the scale, rising to 30% at the other end.
The consultancy said this illustrated two emerging approaches to illiquid assets within default strategies. Either a provider has a single default with a modest allocation to illiquids, or it operates a core and premium approach, where the core fund has minimal exposure to illiquids and the premium option has a higher allocation.
The core and premium approach is currently the most popular in the market, Isio said, as it covers two different cost points and targets different levels of investor sophistication and risk appetite.
The multi-asset approach
Master trusts are increasingly taking a multi-asset approach to private market allocations, with real assets – particularly infrastructure and property – and private equity leading the way.
These asset classes account for over two-thirds of each provider’s asset allocation, Isio reported.
Some providers are also taking a greater interest in natural capital, as investors seek out assets that can make a positive impact from a sustainability perspective.
Long-term asset funds – a relatively new option for defined contribution investors – are now a key implementation vehicle, but Isio’s report also found that some providers were exploring co-investment and direct investment models.
Master trusts predominantly rely on external expertise for illiquid assets, with the majority managing less than 20% of illiquid allocations internally. This may start to change at some organisations, however, as The People’s Pension is building its internal team and Nest has recently invested directly into infrastructure manager IFM Investors.
Nest intends to increase its investments in unlisted infrastructure, private equity and other similar asset classes from 17% – currently around £8bn – to 30% of the portfolio over the next few years. The People’s Pension is targeting an initial £4bn of investment into private markets.
The choice between internal and external management is often influenced by cost considerations, scale, and governance requirements, Isio’s report said, with some providers using a mix of both within their illiquid portfolios.
