Pension trustees have been encouraged to focus on long-term value over short-term cost, after analysis from Hymans Robertson suggested that up to £250bn of defined contribution (DC) assets could be committed to private equity investments by the end of the decade.

The firm’s report, Illiquid Investment Embracing the Opportunities, argued that significant allocations to private equity have the potential to improve retirement outcomes for DC savers by well in excess of 10 per cent based on a consensus view of returns.

Indeed, the report pointed out that, even in the lower-than-average performance years, assuming an expected return of 6-10 per cent per annum, a 10 per cent allocation to private equity would improve retirement outcomes by more than 10 per cent.

It also found that there could be scope to introduce material allocations to illiquid assets more generally and improve the retirement outcomes for "millions of savers".

However, although the report suggested that the changes to the charge cap could be “potentially helpful for easing barriers to meaningful allocations to less liquid assets”, it argued that a wider cost to value shift in approach is required to drive change more materially.

The report stated: “Although fees charged by private equity managers are higher than most other asset classes due to the high level of manger involvement in the investment process, we don’t think this should put off DC investors.

“We would expect private equity to achieve higher returns net of investment fees in the long run compared to public equity, and so the focus should be on the impact to member outcomes rather than the level of fees paid.”

Adding to this, Hymans Robertson head of DC investment, Callum Stewart, stated: “The last decade has been a time of change for the UK, with the government looking to encourage long-term investment in the UK economy and try to breakdown some of the barriers to investing in illiquid asset classes through initiatives such as the Patient Capital review, the ‘levelling up’ agenda and guidance produced by the Productive Finance Working Groups.

“Our research finds that there is a potential for exceptional net return from private equity investments, however the variability of returns can be vast, and selecting high quality managers will be crucial to longer term success.

“However, taking such a risk can pay off and we found that there is the potential for up to £250bn of DC asset classes to be committed in this way by the end of the decade.

“A change of mindset is needed to truly deliver better outcomes for members, with a diversified thought process towards longer-term value rather than short term cost.”

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