The UK government’s Pension Schemes Bill, announced in July, aims to deliver strong returns for pension holders, enable bigger allocations to alternative investments, and unlock billions of pounds to support economic growth and the climate transition.
We welcome the subsequent proposals made by Chancellor Reeves in her Mansion House speech and their focus on consolidating the UK’s fragmented pension schemes, which we see as a crucial step in delivering these objectives. It is the first step toward creating the scale and the governance sophistication required to improve access to the asset managers and alternative investments that can enhance diversification.
In this paper, by presenting optimised model portfolios, we aim to demonstrate how well-calibrated, diversified investments and exposure to alternative asset classes can improve retirement outcomes for pension scheme members. We believe the ongoing UK government review will make it easier for pension scheme managers to implement such portfolios.
Executive Summary
- Consolidating the UK’s highly fragmented Corporate Defined Benefit (DB) and Defined Contribution (DC) pension schemes can reduce costs, increase efficiency and improve access to high-return alternative investments, ultimately benefiting savers and the UK economy.
- The pension models of Canada and Australia highlight the advantages of strategic consolidation and diversification: by investing in private assets, in particular, these countries’ large pension funds have achieved significant returns that have enhanced pensioner welfare and spending capacity.
- Consolidation aligns with the UK government’s objectives by potentially making it easier to channel long-term investments into low-carbon infrastructure and other solutions that support the climate transition.
- As regulatory requirements increase, particularly around environmental, social and governance (ESG) factors, larger consolidated funds will be better equipped to meet these demands. Scale enables access to quality talent and external expertise that can support the climate transition and other sustainability-related goals.
DC Portfolios: Switching From Public Equities to Alternatives Can Enhance Risk-adjusted Return, Even After Fees
| Illustrative Portfolio | Optimised Portfolio | Change | Asset Class Fee | |
|---|---|---|---|---|
| Cash & Equivalent | 5% | 5% | - | 0.08% |
| GBP Gov/Agency | 4% | 2% | -2% | 0.08% |
| Global Gov/Agency | 3% | 4% | +1% | 0.08% |
| GBP Corp IG | 4% | 8% | +4% | 0.08% |
| Global Credit | 5% | 3% | -2% | 0.08% |
| Core Fixed Income | 21% | 22% | +1% | |
| UK Equity | 23% | 14% | -9% | 0.10% |
| Global Equity | 50% | 41% | -9% | 0.10% |
| Public Equity | 73% | 55% | -18% | |
| Hedge Funds | 3% | 2% | -1% | 2.00% |
| Insurance-Linked Strats | 0% | 0% | - | 2.00% |
| Direct Lending | 0% | 5% | +5% | 1.00% |
| Specialty Finance | 0% | 0% | - | 1.00% |
| Residential Mortgages | 0% | 0% | - | 0.40% |
| Private Equity Buyout | 1% | 8% | +7% | 2.00% |
| Venture Capital | 0% | 2% | +2% | 2.00% |
| Infrastructure | 0% | 5% | +5% | 0.50% |
| Real Estate | 2% | 1% | -1% | 0.50% |
| Alternatives | 6% | 23% | +17% | |
| Expected Return | 5.77% | 6.60% | +0.83% | |
| Volatility | 11.60% | 10.70% | -0.90% | |
| Fee | 0.18% | 0.39% | +0.21% | |
| Net-of-Fee Return | 5.59% | 6.21% | +0.62% |
Source: Neuberger Berman, Bloomberg, Cambridge Associates, Burgiss, FactSet. Analytics as at 31 August 2024. The performance and risk projections/estimates are hypothetical in nature and reflect the Neuberger Berman’s Capital Market Assumptions. Non-GBP assets are hedged to GBP using three-month forwards (-0.20% USD to GBP).
IMPORTANT: The performance and risk projections/estimates are hypothetical in nature and reflect the Neuberger Berman’s Capital Market Assumptions. The estimates do not reflect actual investment results and are not guarantees of future results. This material is for educational purposes only and nothing herein constitutes investment advice or an investment recommendation. Asset classes are represented by benchmarks and do not represent any Neuberger Berman investment product or service. Estimates are shown gross of fees which do not reflect the fees and expenses associated with managing a portfolio. If such fees and expenses were reflected, estimates shown would be lower. Please see disclosures at the end of this material for additional information regarding Neuberger Berman’s Capital Market Assumptions.
