Is the marriage of UK defined contribution (DC) pension funds and private markets going to be long-lasting and productive or will these partners prove to be incompatible?
The question is important as there is a strong political element behind the planned marriage as well as investment reasons. This arises from the desire for UK governments to seek the alignment of substantial pension fund assets with their economic policy goals. The intent here is positive; pension fund investment in private market asset classes, such as private equity, private credit, infrastructure and real estate, should support jobs, innovation and growth in the UK economy.
So under the Mansion House Accord of May 2025, 17 of the largest UK pension providers voluntarily agreed to invest at least 10% of their DC default funds in private markets by 2030, with half of this allocated to UK assets.
There are reasons why UK DC pension funds and private markets could be highly compatible long-term partners – but that is not a given. This article sets out some lessons for UK schemes by drawing on the experiences of superannuation funds in Australia and DC pensions in the Netherlands – two markets that have already undergone a significant allocation shift.
Starting the private markets journey
It is estimated that around 4% (1% private equity and 3% infrastructure) of UK DC workplace pension funds are allocated to private market assets[1], well below the target set by the Mansion House Accord. It is also low in comparison to Australian superannuation (super) funds, which have an average allocation to private markets of 16.5%[2].
Australian super fund investment in private markets and unlisted assets has been shown to have improved returns and portfolio resilience[3]. At the same time, their experience also shows what is required when making significant allocations to private markets.
Michael Weaver, general manager, mid risk assets & UK at Australian Retirement Trust (ART), one of the largest super funds with 2.4 million members and assets of AUD$370 billion, said: “We have about 30% of our overall portfolios in unlisted assets. The largest asset class is infrastructure at around 12% of total assets and real estate is probably around 7%. Private equity is also around 7% while private credit is approximately 4%.”
Weaver adds that this is not unusual for big super funds: “30% is little above average. There are some funds that are close to 35% or 40%, but most big funds are probably 23% to 25% in unlisted assets, while there are some that have only 5% to 10% allocated to unlisted assets.”
MLC Super is one of Australia’s largest retail superannuation funds, with AUD$93 billion in assets, with the vast majority of this in DC assets. Steve Gamerov, Head of Diversified Portfolio Management at MLC Super, commented: “In our flagship default offerings, we have between 25% and 30% across private markets, and we have built that up over the past eight years.” He added that this allocation covers real estate, infrastructure, private equity, private credit and alternatives[i].
One benefit of private market assets is as a diversifier to listed assets. Gamerov said: “We’ve had four consecutive years of double-digit returns from global equity markets, which is more than likely not sustainable.”
Private market assets also have valuable investment attributes in their own right. “The cash flows from infrastructure and commercial real estate assets are long-term in nature. They very often are contracted, or regulated, so they tend to be stable, and often have linkages to inflation. Infrastructure, in particular, has less cyclical exposure, so it is less sensitive to the economic cycle. These characteristics are very attractive for a long-term superannuation fund investor,” Gamerov said.
For UK DC funds new to private markets, where and how to start depends on various factors, from the desired risk and return profile, internal resources and how much can be allocated. When Australian super funds started in private markets in the 1990s, domestic infrastructure was often a starting point, due to factors such as a ready supply of privatized domestic infrastructure assets, as well as tax and currency reasons.
In the UK, investing in a pooled fund could make a sensible first move into private assets. “A UK pension fund with £25 billion in assets could allocate £100 million to a global fund, which has a diversified pool of assets,” Weaver said. “That’s a classic way to get access to assets such as infrastructure, real estate, private equity or private credit. The investor is not taking idiosyncratic risk and while maybe fees are not as low as a large direct investment, it makes sense from a risk perspective.”
In-house teams will face new demands
Like the Australian pension system, the Dutch pension system is widely regarded as a world-leading model, and it also has made extensive use of private markets. Pieter Regnery, founder of Pro-Diligence, a due diligence consultancy, and former senior investment professional at one of Europe’s largest pension institutions, said investing in private markets goes far beyond the process of putting an investment mandate out to a competitive tender, which leads to a manager selection exercise, as happens in listed markets.
“There are three things that investors need to understand about private markets. Firstly, it is a labour-intensive, time-consuming activity. Secondly, scale is needed to run an in-house team or to invest directly. Thirdly, it’s all about a commitment strategy, investing over the economic cycle. It’s not a one-off investment; that’s a gamble. Investors need to do proper due diligence on any external partners, because they could be working with them for 15 years or longer. You have to make sure that you and your partners are like-minded people. If not, misalignment tends to surface sooner rather than later.”
ART’s Weaver said that in-house management of private assets is not always the best option, even for the biggest pension funds. “Some of the largest pension funds have hired relatively inexperienced investors to run an internal team, but suddenly they do a couple of bad deals and then they think ‘we should not try to do this all ourselves, we’re a pension fund, not a fund manager.’”
While ART does have a sizeable internal team, this is needed to cover its direct and indirect investments in the different unlisted asset classes around the world, Weaver explained. “We partner with high quality investment managers locally and globally to invest into assets directly, but then also into funds that managers run. For example, the managers that we deal with in infrastructure show us different investments that they are considering and then we underwrite those alongside them if it makes sense for our portfolio.”
MLC Super also works with asset managers using a ‘fund and co-investment’ approach. Using infrastructure as an example, Gamerov commented: “We have close to 10 specialist infrastructure managers across the globe and have built up exposures to particular strategies that they offer. In addition, we’re investing in individual asset exposures through a co-investment programme alongside those managers. The benefit of this approach is that it is less resource-intensive than building a direct team or picking individual assets yourself.”
Gamerov added: “A key part of getting exposure to co-investment assets is the scale that you bring, because managers typically allocate opportunities to their largest relationships, where investors have invested in their own commingled funds”.
Managing private market costs and charges
Costs are another issue for DC funds to consider when investing in private markets, as fees can be complex and high for DC funds. Private equity managers, for example, usually charge an annual management fee and performance-related fees. Similar fee structures can be found in other private market assets, including infrastructure and real estate, particularly for more opportunistic, or higher risk, higher return strategies.
This is where scale can help reduce costs. Gamerov commented: “Having a co-investment programme is important for us, because it helps drive down costs. If you commit to a manager’s fund, typically you are offered co-investments at significantly reduced fees. It’s part of the reason why co-investments have been an important part of the solution here in Australia.”
Higher fees in private markets can also be counterbalanced by a move to more passive investment and lower-fee solutions in DC schemes’ public markets portfolios, as investors work out where to get the best return for their fee budget. “The shift towards more passive management has also been driven by the widespread underperformance of active managers in public markets over the last few years, as active managers have been challenged by a very concentrated, technology-driven rally in public markets,” Gamerov said. He added: “We’ve seen our fees decline for our membership base despite increasing exposure to alternative and unlisted assets. Part of that is through the scale that we’ve built, which helps us negotiate lower fees.”
This is the first of a two-part series on UK DC pensions and their plans to increase allocations to private markets. The next article will look at how DC pension funds can manage illiquidity in private market assets and how private markets can help support DC member outcomes in the decumulation phase.
Matt Craig is a senior consultant at CoreData Group, a global specialist financial services research and strategy consultancy. To find out more about our industry insights and research programmes, you can reach him at [email protected]
[1] DWP paper, Pension fund investment and the UK economy, November 2024, published in support of the Pension Investment Review.
[2] Analysis for Frontier Investors for SMC shows that approximately 16.5% of assets in APRA-regulated superannuation entities are invested in unlisted/private market assets such as property, infrastructure, private credit and private equity. Source: ASIC discussion paper – Australia’s evolving capital markets, May 2025.
[3] See Performance of super funds in Australia: The contribution of alternatives and active management Monash Business School, April 2026, for a detailed and nuanced review of this area.
[i] At MLC Super, this includes different types of niche, credit-based strategies, including insurance-related strategies, but not traditional hedge funds.