Defined contribution (DC) pension default funds could increase private market allocations from around 2-4 per cent today to 15-30 per cent by 2035, according to Standard Life and WPI Economics.

The report, From Scale to Impact: A Blueprint for the Future DC Pensions Market, explored how consolidation and pension reforms could impact default fund investment.

It projected that consolidation could create a market dominated by 10 to 15 schemes with more than £50bn in assets each by 2035, enabling default funds to increase private market allocations from around 2-4 per cent to between 15 and 30 per cent.

The report suggested future default funds could hold a broader mix of private market assets, with private equity and venture capital accounting for 30-50 per cent of allocations, private credit 20-40 per cent, and infrastructure and real assets 20-40 per cent.

Standard Life said this mix could support more diversified portfolios and stronger long-term outcomes for savers by combining different sources of return and risk.

The report suggested that UK DC schemes were likely to draw on approaches seen by their international peers, such as Australian superannuation funds and Canadian pension funds, combining infrastructure's diversification and inflation-protection characteristics with the growth potential offered by private equity and venture capital.

The report estimated that 30-50 per cent of future private market allocations could still be invested in UK opportunities, compared with 5-10 per cent of listed equity investments.

By 2035, this could see between £40bn and £200bn of DC pension assets invested in UK private markets, up from an estimated £2bn-£3bn today.

Standard Life product director, Jenny Holt, explained that while interest in private markets has grown significantly in recent years, adoption is “developing at different speeds” across the workplace pensions market.

She said: "This research explores how the DC market could evolve over the longer term if schemes continue to consolidate and gain greater scale. In that environment, larger schemes may be better placed to access a broader range of investment opportunities and build more diversified portfolios.

"Ultimately, the focus should not be on allocation targets alone, but on the value private market investments can deliver for members. Different schemes are likely to take different approaches as the market develops, but any investment strategy should remain focused on improving member outcomes, delivering value for money and being supported by strong governance and a clear investment rationale."

WPI Economics director of policy, Joe Ahern, added: “Scale changes what pension schemes can invest in and how they invest. Larger schemes are better positioned to access a wider range of opportunities, build specialist expertise and construct more diversified portfolios across different private market asset classes.

“The challenge now is ensuring the wider regulatory and commercial environment supports schemes in accessing those opportunities while maintaining a relentless focus on delivering value for savers.”

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