UK pension schemes are undergoing a structural shift in asset allocation, with a growing focus on private markets, productive finance, and long-term diversification, research by the Pension Policy Institute (PPI) has suggested.

In its report, Pension scheme assets – how is asset allocation changing and why?, the PPI said this shift is influenced by a mix of maturing defined benefit (DB) schemes, evolving defined contribution (DC) strategies, and various policy developments.

The report highlighted six key themes currently shaping investment thinking in UK pensions: a clear search for diversification away from public markets toward private markets, the importance of scale, the role of social impact in decision making, securing the endgame in closed DB schemes, the uncertainty surrounding Local Government Pension Scheme (LGPS) reforms, and geopolitical uncertainty.

The research indicated that the total value of UK pension assets has grown by 11 per cent over the year, from £2.9trn in 2023 to £3.2trn in 2024, with DB and annuities continuing to represent just under two-thirds of assets reflecting their ongoing significance in the pension landscape.

However, the analysis also pointed to a gradual shift in the UK pension landscape towards DC pensions, but also movement between sectors.

For example, the PPI noted that when members use funds from workplace DC plans to purchase an annuity, it effectively shifts assets from DC to DB characteristics, since annuities share more features with DB plans than with DC plans.

In some cases, assets may also transfer from workplace DC plans to individual DC plans, such as self-invested personal pensions, at retirement.

The PPI further highlighted a “significant shift” within private sector DB schemes towards greater bond holdings and a reduction in equities and alternatives.

Meanwhile, public sector DB schemes have also increased their bond allocations, though listed equities and alternatives still make up more than 70 per cent of their assets.

The PPI noted that the gradual transfer of DB liabilities to pension annuities has also resulted in an effective transfer of UK pension assets towards corporate bonds and, to a lesser extent, alternatives such as property and infrastructure.

Meanwhile, workplace DC assets are “dominated” by listed equities, particularly in the growth phase of default funds, with alternatives representing a "very" small proportion.

Indeed, just under half (44 per cent) of UK pension fund assets are held in equities and alternatives and £1.4trn are held in UK assets, with UK government bonds making up the largest share.

PPI deputy director, Suzy Morrissey, said: “It’s clear that the way in which UK pensions are invested is undergoing a period of transition, with assets moving in a number of directions, but principally away from DB towards annuities and DC.

“This is having an important effect on asset allocation with less demand for gilts and, gradually, more demand for diversity in the mix of assets held.”

However, she noted that despite the shift to private markets, particularly in public sector DB, it would “take some time” to see the effect clearly in workplace DC.  

In terms of investment in productive finance, the report found that between 10 per cent and 60 per cent of all pension funds are invested in productive finance, depending on the definition, with between 6 per cent and 20 per cent invested in UK productive finance.

Overall, the PPI estimated that 6 per cent of the total value of assets is invested in UK productive assets (private equity, property, other alternatives) with DB leading the way.

However, when UK corporate bonds and UK-listed equity are added, this brings the proportion up to 20 per cent with annuity providers leading the way.

The report also suggested the data does not yet fully reveal any significant impact of government reforms, such as the Mansion House Accord, on allocations to private assets.

However, it said there are plenty of indications that this will happen in time as schemes grow and build their internal capabilities.

Morrissey added that schemes and providers have told the PPI that for allocations to UK private assets to take off, the pipeline of investment opportunities must be visible, and the burden of UK planning rules must be lifted and overriding all of this are the responsibilities of fiduciary and consumer duties.

“2025 and 2026 will be periods of further change for the sector with the Pension Schemes Bill, LGPS consolidation and pooling, new value-for-money regulations, and the implementation of the Mansion House Accord. All will have consequences for asset allocation,” she said.

Morrissey said that whether or not it can detect this shift in data will depend on the availability of consistent and complete data across the sector, something she said, “remains lacking”.

However, she suggested that the Financial Conduct Authority's forthcoming requirement for asset allocation data collection could prove helpful for this.

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