UK pension schemes are interested in investing in private markets but are being held back by opaque fees, governance and knowledge gaps, regulatory uncertainty and a shortage of suitable investment opportunities, The Pensions Regulator (TPR) has found.

The regulator’s report, Market oversight: UK pension funds - private market investment, drew on engagement with more than 40 stakeholders, including trustees, pension schemes, investment consultants, industry bodies and investment managers.

It noted that trustees and their advisers were generally open to UK private market investments where they met their scheme’s requirements for expected returns, risk, diversification, cash flow and liquidity.

Indeed, most large defined contribution (DC) schemes and master trusts had already invested in private markets or intended to do so, while Long-Term Asset Funds (LTAF) were providing some schemes with an initial route into the asset class.

However, material allocations remained less common, with schemes making their first substantial investments beyond real estate typically using diversified funds combining assets such as private credit, infrastructure, property and private equity.

Appetite for venture capital, particularly UK venture capital, was more limited due to factors such as small investment sizes and the governance burden.

Where schemes had invested, they generally focused on later-stage or scale-up opportunities carrying lower risk.

TPR also found that some multi-employer master trusts were targeting a minimum 10 per cent allocation to private markets by 2030, including at least 5 per cent in UK assets.

Other schemes had total private market targets of 20 per cent or more.

However, some schemes had avoided firm UK allocation targets because of concerns about potential tensions with trustees’ fiduciary duties.

Stakeholders also questioned whether enough UK opportunities offered the returns and other characteristics needed to compete with investments available elsewhere.

The report identified a strong pipeline of high-quality, investable opportunities and suitable fund structures as critical to achieving the ambitions of the Mansion House Accord.

Fees were another recurring concern, particularly performance-related charges, opaque additional costs and uncertainty over how private market costs were treated within charge-cap calculations.

Some DC and master trust providers also raised concerns about potential cross-subsidisation between different cohorts of savers.

Meanwhile, TPR identified gaps in trustee knowledge and a shortage of specialist private market expertise within the DC consulting sector.

Private assets typically required schemes to operate more sophisticated governance and risk-management arrangements than public market investments.

Policy, political and regulatory uncertainty, including uncertainty surrounding future scale requirements, was also holding back some schemes.

In contrast, appetite among defined benefit (DB) schemes was generally limited.

TPR noted that many DB schemes were well funded and reducing investment risk, while illiquid assets could restrict their flexibility or expose them to penalties if they subsequently sought to transfer benefits to an insurer.

TPR executive director of market oversight, Ben Gunnee, said: “Pension schemes want to invest in private markets, but many schemes are currently experiencing practical barriers that limit their opportunity for investment.

“Our research can help government and industry understand what’s getting in the way and where action could unlock investment that benefits members and the wider economy.”

TPR urged trustees to begin with member outcomes, their scheme strategy and risk profile, and consider how their scheme could develop over the next five to 10 years.

Trustee boards, it continued, should assess whether they possess sufficient knowledge, experience and time to evaluate and monitor private market investments, as well as reviewing the capabilities and objectives of their investment advisers.

Schemes expecting to make material allocations should also strengthen their risk controls to address issues such as concentrated exposures and liquidity pressures during market disruptions or significant scheme events.

TPR added that it would use its supervisory engagement to challenge trustees over their investment strategies and governance capabilities, while continuing to work with government and industry on initiatives intended to remove barriers.

Pensions Minister, Torsten Bell, said pensions represented a “huge source of potential investment” for the UK.

“This research moves us closer to understanding the barriers holding schemes back, helping us work with industry to unlock investment that supports a stronger economy and better retirements for savers,” he added.

This article originally appeared in our sister publication Pensions Age.

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