Private market investments could help boost the level of pension engagement and contributions among defined contribution (DC) members, which remains low, according to research from Legal and General (L&G).

L&G's annual DC member research found that over two thirds (68 per cent) of DC savers would feel more engaged with their pension if it was invested in assets like affordable housing, helping to address the housing shortage in the UK.

Over half (58 per cent) of DC savers do not know that their pension money can be used to change the way companies work and the broader society.  

Meanwhile, 63 per cent of members said they would feel more engaged if their pension was helping to drive the energy transition by investing in clean energy.

In comparison, 57 per cent said that allocations to spin-out businesses from university science and technology departments would boost their engagement.

L&G pointed out that this research supports the view that people’s engagement with their pension can be linked to the “tangible” impact they feel their contributions are making on society.

Furthermore, the firm said including private markets in pension portfolios could potentially drive higher contributions, with the research finding that 55 per cent of respondents agreed that they would be inclined to pay more into their pension if it was invested in affordable housing.

In addition to this, 52 per cent said they would be inclined to pay more into their pension if it was for allocations to clean energy, while 49 per cent said the same for innovative start-ups.

Alongside this, respondents acknowledged the potential enhanced returns private markets could offer, with 60 per cent stating that investing in affordable housing could result in better returns for their portfolio.

Furthermore, 58 per cent believed that investing in clean energy has the potential to offer better returns.

In addition to this, L&G conducted further research with DC scheme decision-makers about their attitudes to the future of their private market allocations, highlighting that DC schemes are prioritising environmental and social outcomes.

The research found that eight in 10 (80 per cent) expected this trend to accelerate over the next two years.

L&G’s research found that climate transition, digital transformation & artificial intelligence and healthcare held the biggest appeal for DC schemes when considering thematic opportunities in private markets.

When asked about their focus on environmental incomes, 87 per cent said that clean, renewable energy infrastructure is their biggest priority, while 47 per cent said transmission assets.

Meanwhile, from a social perspective, half (50 per cent) of schemes believed that social issues in private market investments would enhance long-term returns, with 43 per cent prioritising allocations to affordable housing.

The research also indicated that savers appreciate the role of private markets at the right time in the investment journey, with 82 per cent of members concerned about the potential of more risk of an investment loss compared to traditional investments.

Given this, L&G suggested there is an “important” role for member education around how a diversified pool of private market investments can aim to fit into a DC portfolio.

In particular, these concerns were highest in older generations, with 73 per cent of respondents aged 50 and over worried that investing some of their pension money in assets that might not be quickly sold could carry the risk of them being unable to access their pension money easily when the time comes.

The findings indicate that wider exposure to private markets could be better suited for those in the earlier growth stages of a pension, recognising the importance of integrating private markets with varying levels of exposure at different stages of their retirement journey, as well as diversifying appropriately.

The research also highlighted positivity among Millennials and Gen Zs on the integration of private markets into their pension portfolios.

According to the research, 74 per cent of respondents in these age groups feeling positive about their pension if their funds were being used to help support affordable housing schemes, due to the challenges facing these generations in getting onto the housing ladder.

Additionally, 81 per cent of Gen Z said they would be willing to pay more for a pension which was helping to drive forward technology and innovation in the UK, compared with 51 per cent of Baby Boomers.

Commenting on the findings, L&G head of DC, Rita Butler-Jones, said: “Greater pension engagement is a puzzle the UK pensions industry has been trying to solve for decades.

“As we see growing allocations of pension capital to private markets, it is encouraging that when savers are aware that their pensions can be used to drive positive real-world change, it fosters an increased sense of engagement, wellbeing and connectivity with their retirement pot.

“Private markets could therefore not only help to drive greater potential returns across UK pensions, but potentially greater member engagement and contributions too.”

Jones said L&G was committed to “opening up” private markets for DC savers, citing the launch earlier this year of L&G’s Private Markets Access Fund.

“We want to inspire DC members into greater engagement with their pension by investing in tangible assets which can aim to benefit the real economy, while also providing access to the potential returns on offer through private markets,” she added.

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