Recent developments have changed the game for UK pension funds. Amid rising interest rates, around 90% of defined benefit (DB) pension
schemes are now in surplus, totalling £475.5bn just last month. In
response, 53% of large DB schemes are targeting buy-outs, putting bulk purchase annuities(BPA) transactions on-track to hit a record-breaking £80bn in 2024.

This raises questions about where all that money will go.

With new entrants like Brookfield, Royal London and Utmost bolstering the UK’s
BPA market, as well as the Schroder-Phoenix alliance, Future Growth Capital (FGC), emerging to support the Mansion House Compact, it looks like the stage is being set for an influx of pension money into UK private markets.

But is driving pensions into private businesses really a good idea? Some say no, arguing that the opaqueness and costliness of private markets leaves stakeholders and members open to unnecessary risk. Do they have a point? Sure. Does that mean channelling pensions into private markets is a mistake? Absolutely not. 

The shift is epochal and represents huge growth opportunities for UK markets. After a period of low risk appetite and a waning stock market, pushing pension
funds into UK private businesses is the best chance the country has at rejuvenating its economy.

But if this move is going to happen, the sector at large needs to assuage outlying concerns by de-risking the process. Clearly, the private marketplace must become more transparent, efficient and cost-effective. Technology, as it turns out, could be the answer.

DB pension schemes need to up the ante – but this demands a more transparent marketplace

The allure of private markets lies in their potential for higher returns. Truth be told, it’s about time British DB schemes took on more risk. Their historic reliance on low-risk investment strategies, which prioritise security over returns, makes it difficult to generate additional funding. This puts them in a sticky position when it comes to managing increasingly unpredictable longevity risks and the future liabilities that come with them.

Private markets offer a broader range of assets as well as a stable and controlled environment for braver investments – meaning much juicier returns. Even better, with more domestic investment management firms like FGC coming to the fore, investors will be more encouraged to put pensions into UK private businesses rather than overseas, meaning more retained capital and a
stronger macroeconomy. FGC alone has committed to deploying £20bn of investor funds into private markets over the next decade.

Despite the advantages, concerns around the opaqueness of private markets are not unfounded. The lack of transparency, coupled with high fees and complex structures, can make it difficult for pension funds to fully understand where their money is going and what risks they are taking on.

Still, the move to private markets is a smart and necessary one. If we are to embrace it – and we must – then we need to answer the demand for transparency, cost-efficiency and accessibility. The debate isn’t whether private markets are a bad choice for pension funds – they are not – it’s how we can make private markets fit better within the institutional marketplace.

The role of technology in de-risking private markets

Investing in private markets is currently a resource-intensive process requiring extensive due diligence. Even then, visibility remains poor, with 83% of pension fund investment managers struggling to achieve a holistic view of private market investments.

If pension funds were able to do all this virtually via a singular, independent platform, they would save an extraordinary amount of time, money and risks.

There are a number of platforms attempting to do this at the
moment. One example is Floww, a virtual
private marketplace that provides the necessary plumbing for a more transparent
and efficient investment process.

These sorts of platforms allow investors to request detailed
information directly from the entities managing their investments, ensuring
they have more of the necessary details to make informed decisions about where
their investments go. This greater level of transparency is needed in private
markets, where information asymmetry has long been a significant concern.

By consolidating the investment process into a single place,
platforms like Floww streamline, economise and level the playing field, making
private markets more accessible to a broader range of investors. As the UK
private market continues to boom with pension funds, leveraging this kind of
technology is more than just a strategic move – it’s the right move.

Tapping into the universe of opportunity

We’re standing in the midst of burgeoning change, and the future is bright. Technology will be the biggest enabler, future-proofer and de-risker of pension funds going into private markets.

Opinions within institutional markets are changing – and this, combined with technological developments, represents the kind of progress that must occur if this move is to be fully, and sustainably embraced.

If you’re interested in discussing this further, or exploring opportunities in the pensions, insurance and investment space, I’d love to have a conversation with you. Contact me
directly and we’ll set up a call.