XPS Pensions Group has launched a new solution to enable small and medium-sized defined contribution (DC) schemes to target a 20 per cent allocation to private market assets in their default strategies.

The strategy, accessible for DC schemes with total assets of £30m and above, was launched in response to the Chancellor’s 2023 Mansion House reforms, as well as more recent proposals designed to encourage greater DC investment in private market assets.

Thought to be a "first-of-its-kind solution", it aims to provide wide-scale access to illiquids for small and medium sized DC schemes in a cost-efficient way, while also offering the flexibility to be tailored to individual scheme requirements.

Under the strategy, a scheme invests via a platform provider who manages a blended fund, periodically rebalanced to maintain the target allocation.

Each blended arrangement is a scheme specific structure so there are no other investors to deplete the liquid component.

Although the arrangements would include additional fees of the order of 0.4 per cent per annum compared to investing in a traditional liquid strategy, XPS suggested that this will be offset by higher returns and greater diversification from listed markets.

Indeed, XPS projected that the additional net return would be expected to increase a typical member’s pot by 7 per cent.

It also argued that, in addition to expecting higher returns, the private market focus could provide scope for additional environmental, social and governance (ESG) impact through targeted private market investment in key sectors.

Commenting on the launch, XPS Pensions Group head of DC investment, Mark Searle, said: “There is a huge opportunity for DC schemes to benefit from growth in private markets, but until now, this has only been accessible for the largest schemes.

“This approach is the first-of-its-kind to provide access of this magnitude to illiquid private market assets for mainstream small and medium sized DC schemes.

“We set out with the ambition of creating an approach that allows as many DC members as possible to benefit from the merits of private market assets, without having to wait for a change in regulation from the Government.“

Adding to this, XPS Pensions Group chief investment officer, Simeon Willis, noted that while liquidity snaffling has caused high profile difficulties for pooled arrangements, XPS' approach will give each scheme choice over its own arrangement, combining liquid and illiquid assets.

"This gives them autonomy over choosing funds and how the allocation changes through time, and crucially maintains independence from other investors," Willis stated.

“This new approach will give schemes substantive exposure to illiquid assets, without the potential for other investors to eat up their liquidity buffer for breakfast."

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