U.K. multiemployer defined contribution plans are taking their first steps to incorporate direct investments such as infrastructure into their default funds after a sharp increase in assets over the past few years.
Increases in the combined employee and employer contributions rates in both 2018 and 2019 have given sponsors more money to diversify into new asset classes. Assets of U.K. master trusts increased to £29 billion ($36 billion) as of January 2019 vs. £16 billion in January 2018 and £10 billion in January 2017, according to data from The Pensions Regulator, which regulates U.K. schemes.
But greater scale isn't the only thing that's working to their advantage.
Operational and liquidity challenges, which had stopped DC plans from investing in private markets directly, are subsiding and making it possible for executives to embrace illiquid investments, much as superannuation plans in Australia have done, sources said.
"In Australia, alternative investments are much more common – on average, super funds allocate around 20% to illiquid or less liquid investments like infrastructure, property and private equity," said Maria Nazarova-Doyle, principal, DC and individual wealth at Mercer LLC.
"As the U.K. DC market develops and grows, it is only reasonable to assume that we will follow in the footsteps of this more mature DC market," she added.
One U.K. plan has already made the leap.
The £7.5 billion National Employment Savings Trust, London, started its first illiquids program Sept. 12, adding a joint 5% real estate debt and infrastructure debt allocation to be managed by Amundi and BlackRock Inc., respectively.
"We will start deploying capital (in) October. We are targeting about 5% by committing £500 million over the first 12 months, but we will probably be investing more than that next year as (NEST's AUM) will probably be at £13 billion (then)," CIO Mark Fawcett said at a news conference.
"One of the attractions for infrastructure debt is that we can help finance wind farms and renewables. There are some positive environmental, social and governance opportunities," he said.
Mr. Fawcett said NEST also plans to include infrastructure equity in its default choice. "Probably toward the end of the year, we will announce a search for a fund manager," he said. "We are warming the market up."