UK pension giant opens private markets portfolio to DC members

Universities Superannuation Scheme, the UK’s largest private pension fund, has opened its private markets portfolio to defined contribution members, sister publication Private Equity International has reported.

The move will enable roughly 85,000 DC members, representing around £1 billion ($1.3 billion; €1.2 billion) of funds, to select a private markets allocation within their investment program, according to a statement. Private markets exposure was previously offered to its defined benefits members only.

USS oversees £8 billion of private equity assets, £5.3 billion of infrastructure, £3.6 billion of real estate and £3.2 billion of private debt as of October 2019, according to PERE data. Key assets include on- and offshore windfarms and major stakes in critical UK infrastructure such as Heathrow Airport, Thames Water and NATS, the air traffic control business, the statement said.

The expanded offering applies to the fund’s Default Lifestyle Option.

DC schemes have proved something of a headache for those in the private markets. Such funds are constrained in the amount they can spend on investment and administration by commercial considerations such as internal fee budgets and a regulatory cap on charges attributable to an individual member, according to a 2019 report by the British Business Bank and Oliver Wyman.

A government consultation in February 2019 examined how to encourage DC pension schemes to invest more in long-term or “illiquid” assets.

Liverpool-headquartered USS attributed the ability to offer private markets assets to having in-house investment capabilities through its investment management subsidy. It expects the move to “enhance the return profile” of its Default Lifestyle Option with no increase in cost to members or their employers.

“We have always been clear that any DC investments must be within stringent cost boundaries that demonstrate value-for-money to our members and employers,” chief executive Bill Galvin said in the statement.

USS established a private markets portfolio in 2007 and has nearly 50 people dedicated to its management. The fund oversees more than £67 billion of defined benefit public and private assets, according to its latest annual report.

It was 92 percent funded as of 31 March 2019.

DC assets overtook defined benefit assets in the seven largest pension markets last year, according to Willis Towers Watson’s 2019 Global Pension Asset Study. DC assets had grown at 8.9 percent over the previous 10 years, compared with 4.6 percent for defined benefit assets.