The UK government believes it will increase revenue by increasing retirement funds’ exposure to private assets, but experts also say it will provide a “lifeline” where asset managers charge higher fees for their expertise. There are also concerns about the extent to which risk pension savers automatically enacted in default options will be exposed to default options as part of these reforms.
Pension System Legislation It was discussed in Parliament in early June with the idea of creating a government. Mansion House Accord reality. Signed by the UK’s largest pension provider, the compact promises to invest 10% of its assets in private market assets by 2030.
According to the government, the expansion of this retirement fund is designed to “return to workers’ retirement savings by reducing costs for larger and better pension funds and MLDRs.”
Dunkemp, Morningstar’s Chief Investment and Research Officer, says these changes will provide commercial opportunities for under-pressure fund companies.
“Asset managers see profit margins being squeezed by the growth of passive investments, they may view this as a lifeline that offers the opportunity to charge higher fees for expertise in the uncertain parts of the investment environment.”
Private markets increase options
Based on assumptions about previous returns in private markets, increasing access to such markets could improve retirement savings, but also adds to investors’ complexity and risk.
“As more companies choose to stay in private hands rather than being listed in the stock market, these new products will add additional options to investors and expand their selection at the investment buffet,” says Dunkemp of Morningstar.
“Distinguishability is essential for investment choices, but even more important when choosing a complex product that is newer, unfamiliar, or more familiar to traditional investment funds. This is especially true for investments in private assets, as the results differ significantly from those of funds investing in the open market.”
What is the size of the LTAF market?
Relatively new FCA Regulatory Fund StructureLTAFS was introduced in November 2021. It is designed to facilitate access to long-term non-current assets such as private equity, venture capital and private debt. How to make your automatic pension cash more hard For the savings and the economy.
Morningstar analysts say the LTAFS market is currently relatively immature.
Tracking the growth of these products, they say there are around 30 such strategies currently on sale in the UK, with less than 1% of the broader families of the 4,700 funds sold throughout the UK.
“LTAF coverage is still small, but we expect it to continue to grow,” says Evangeria Gukeka, senior analyst with Morningstar’s manager research team.
“Unsurprisingly, the LTAF market is dominated by large asset managers such as Schroders, BlackRock, Aviva, Legal & General. Currently, they are competing to gain market share in the growing LTAF market.
“Given the complexity of the LTAF strategy, these require institutional-scale resources in terms of investment, research, risk and operational aspects.”
For investors, LTAF can “fill the gap” Between liquid funds offering daily transactions and long-term private structures. For investors who played witnesses to the UK’s long-term saga Gating asset fundsthis might be really interesting.
The government believes this level of flexibility and the scale of opportunity given to “megafunds” investing in these strategies are good for the UK’s defined contradiction pension market.
“DC pension providers are the main target audience because LTAFS provides more flexible access to the private market. The DC scheme aims to increase allocations to the private market,” says Gkeka.
“Wealth Market is also a target group, but we need to make progress in terms of the availability of LTAF’s platform for wealth investors.”
Asset managers consider this a business opportunity too
Commercially, this development offers a significant business opportunity for providers. It happens in a race to the bottom of fees accelerated by the incredible success of passive investments through passive and exchange trade funds in the US, UK and Europe.
Not only will it allow fund managers to claim more, but this change will attract new entrants to this profitable market.
“These new products bring new competitors, a playful asset company that was previously excluded from working with individual investors and financial advisors.
“It is therefore not surprising that many traditional asset managers are exploring a partnership model rather than directly competing with these new participants.”
How is LTAF invested?
LTAF comes in all shapes and sizes. Some people invest widely in “real assets” such as private credit, private equity, commercial real estate, infrastructure liabilities, and professional credits. Others only target specific investments in property or non-current assets, with 100% allocations in one asset class.
One strategy with a broad approach is: Future Growth Capital (Global Ex-uk Ltaf) A commercial partnership between insurance and pension provider Phoenix and asset manager Schroeder. Starting in February 2025 with a first £1 billion commitment from Phoenix, this is now too new to have a performance track record. The UK-centric counterpart strategy is expected to begin later this year with the same asset allocation.
This strategy invests in private equity (35% of the portfolio) and includes other allocations to infrastructure equity (20%), corporate direct lending (15%) real estate obligations (15%), infrastructure obligations (10%), and professional credits (5%). Investors can expect a 90-day redemption period. This is much longer than most liquid, open-ended funds, and takes days to redeem, not months. The management fee is 0.70% per year. It’s cheaper than many funds, but much more expensive than the cheapest passive funds or ETFs.
For Master Trusts, these reimbursement risks have been somewhat reduced if it is the legal structure of a pension strategy that involves participating in multiple employers at once.
“The Master Trust, which controls stocks at LTAF, effectively manages redemption risk,” says Daniel Haydon, analyst at Morningstar.
UK pension pots aren’t big enough
Some suggest that they are the correct answer to the wrong question. What they want the government to focus on is how much money the final investors actually save. Under automatic registration.
According to the Pensions & Lifetime Savings Association, the annual income required for the two to maintain their “minimum” standard of living is currently £21,600. Two households need £60,000 each year to be “comfortable.”
It’s not hard to see why some people think that higher contribution rates are a policy priority.
How automatic registration pension works
Currently, people over the age of 22 must automatically register for pensions when they start work. The revenue threshold that triggers this requirement is £10,000 a year, or £192 a year, or £833 a month. Employers must establish a pension within three months.
The smallest contribution made under the auto-registration rules is 8% of eligible revenue. This is usually divided into 5% employee contributions (4% from the saver, 1% from the government for tax credits) and 3% from the employer itself.
Qualifying revenues usually mean what you earn between £6,240 and £50,270 in the 2025-6 tax year. An 8% contribution means that the largest person in this band, ranging from low-income to middle-income income, can save annually in this framework.
In the best case scenario, you save from 22 years old to your current retirement age of 66 (44 years total), which amounts to a contribution of £155,469.
Assuming the power of compound interest and investment return is in the mix, the final “take-out” retirement pot would be hundreds of thousands of pounds.
However, even if the pot is £300,000, the 20-year retirement period will not leave much of your annual income after tax. The current pension rate provides approximately £6,000-7,000 per year in a pot, so this estimated pot offers approximately £21,000 per year. This basic case also envisions consistent returns and contributions. This has become extremely difficult in the labor market where workers are now frequently changing jobs, and in an environment where inflation is at 3.4%. We also rule out the tax impact.
Pensionbee figures for 2024 show that the “average” pension pots for all ages are now much lower, at around £20,000.
Are pension contributions in the UK too low?
“This broad (pension plan) bill is set to guide the largest pension reform since automatic registration,” said Yvonne Brown’s policy director for long-term savings policy at the British Insurance Association, a trade association representing insurance and pension providers.
“Details are very important and we will scrutinise the bill to ensure the benefits of our savers are first and we also need to urgently address the levels of pension contributions that are too low to get the right retirement income for many.
In that case, it is a commercial opportunity for fund managers, but for the final investor to take note of their retirement plans.
“As all visitors to the buffet know, the option is available, not just because it needs to be added to the plate, and it doesn’t combine well with previous options,” says Morningstar Kemp.
