What the government’s own numbers say about investing in private markets

The government’s own analysis of the impact of greater investment in private markets by pension schemes shows “considerable uncertainty” around potential investment returns.

Analysis by the Government Actuary’s Department (GAD) found that raising pension schemes’ exposure to private markets “may deliver slightly improved outcomes to members”.

However, the GAD also stated that there was “considerable uncertainty, particularly with the assumptions for projected future investment returns”.

The government has repeatedly claimed that its planned pension reforms could add £11,000 to the pension pots of defined contribution (DC) scheme members.

However, its own analysis and reports contain multiple caveats that undermine the certainty with which chancellor Rachel Reeves, pensions minister Emma Reynolds and other ministers and politicians have described the government’s approach.

Following Reeves’ speech at Mansion House earlier this month, the Department for Work and Pensions (DWP) published a paper explaining its approach to consolidation for defined contribution pension schemes and outlining its research, as well as that of the GAD.

What the forecasts said

The GAD said in a statement explaining its involvement that it “undertook the analysis to assess the impact of changing asset allocations on outcomes for defined contribution pension members”.

“Using modelling techniques, GAD illustrated a range of projected defined contribution pension fund values under different investment scenarios,” it explained.

Christophor Ward, investment lead at the GAD, said: “We informed the government of possible options, assumptions and outcomes related to DC pension investment approaches.”

The DWP’s report included forecasts for four different model portfolios. These included a 70% allocation to overseas equities – an approximation of current DC pension scheme portfolios – alongside models for greater listed UK exposure, and two for greater private markets exposures.

Forecasts from the GAD and those based on third-party data showed that greater private markets exposure would underperform current asset allocation, based on a DC pension scheme member earning £30,000 a year and paying the auto-enrolment minimum contribution.

Further analysis based on stochastic modelling showed that a portfolio with greater private markets exposure than the current average for DC pension schemes could deliver marginally bigger pots – but only between £2,000 and £5,000, or up to 2% larger.

Scale and economic impact

The report also stated that the evidence was “inconclusive” around the benefits of scaling up pension schemes and positive impacts on investment returns. Access to expertise and negotiating power were often more impactful, the report indicated.

There was also “no clear consensus” on the optimal level of assets under management needed to achieve scale benefits, despite the government targeting £25bn as the minimum size for DC pension schemes. It cited several international studies – including one from the Australian market – that indicated many benefits of scale for pension schemes “level off” once assets reach £400m to £500m.

Elsewhere in its report, the DWP said it had reviewed several studies exploring links between “a well-developed pension system and supporting economic growth”.

However, it also admitted that the studies often focused on emerging economies in which “impacts are likely to be greater compared to more developed countries due to their systems being less mature”.

“In addition, identifying and isolating macroeconomic impacts can be challenging,” the DWP’s paper stated. “These are important caveats when considering the evidence.”

Felicia Hjertman, chief executive officer at TILLIT, a consumer-facing investment platform, claimed the government was “prioritising politics over the needs of pension savers”.

She added: “Should the government force private pension funds into British infrastructure and start-ups, it would put savers pension pots at risk without any guarantee of higher returns.

“We are already on the brink of a retirement crisis and the government’s intention to bully pension schemes into investing in assets that fit their political agenda is irresponsible at best, and dangerous at worst.”

Further reading

Is bigger really better? Industry reacts to ‘megafunds’ plan (14 November 2024)

How the government plans to scale up DC schemes (15 November 2024)