Will Asia gain from UK pensions' $64bn PE investment plans?

A newly announced plan by UK pension funds to make allocations to global private equity markets could see funds allocated to Asia directly or indirectly, experts told AsianInvestor.
Will Asia gain from UK pensions' $64bn PE investment plans?

A newly announced plan by UK pension funds to unlock up to £50 billion ($64 billion) of new allocations to global private equity markets has a fairly good chance of benefitting Asia, experts have said.

UK chancellor Jeremy Hunt in July announced a ‘compact’ with nine of the UK’s largest pension funds, who pledged to place at least 5% of their defined contribution client assets into global unlisted equities, by 2030.

The increase from the current allocation of 0.5% is predicted to unlock around £50 billion ($64 billion) of new flows into the sector.

If the new flows are distributed globally, private equity markets in Asia Pacific seem likely to benefit.  

“There are currently no restrictions on geography for where the 5% allocation is allocated as part of the Mansion House Compact. If opportunities within Asia look compelling from a risk/reward perspective, then they may be included into a portfolio plan,” said Tom Curtis, workplace savings strategy and commercial leader at the London office of Mercer.

Mercer is one of the signatories to the compact.

He pointed to the benefits of a diversified approach to portfolio construction including considering the global opportunity set and building in geographic diversification.

Curtis said that UK pension funds are currently under-allocated to private markets, and should benefit from the move noting that, typically, DC pension scheme members do not make investments in unlisted equities.

“The inclusion of unlisted equities in DC members’ portfolios provides access to a wider opportunity set of investments, introducing new risk and return drivers, while generating the potential for greater diversification away from listed markets,” he said.

In Australia, where Mercer has managed multi-employer defined contribution schemes for many years, super funds have long made significant investments into private equity, with much of it allocated beyond Australia.


However, the declared objective of the UK government in launching the compact was to unlock funding for UK businesses, to help a struggling domestic economy which, the IMF predicted in April, will be the worst-performing in the G20 in 2023.

Tom Selby, head of retirement policy at AJ Bell, the UK investment platform said that the compact was likely to see funds favouring the UK sector, meaning Asian allocations were likely to suffer.

“Given the announcements were about boosting the UK economy, I’m assuming the focus will be on getting more investment in unlisted equities the government hopes will boost UK economic growth. Clearly, if more UK pension money is invested in UK unlisted equities, that means less will be invested abroad, including potentially in Asian companies,” he said.

Tom Selby
AJ Bell

Allowing global allocations was a concession to pension funds’ fiduciary obligations, according to one person close to the compact, who asked not to be named.

“The pension funds didn’t want to have their hands held so the chancellor agreed the allocations could be anywhere,” they said.

Trevor Castledine, a managing director of the private markets team at bfinance in London, more than half of whose institutional clients are based in Asia, agreed that flows were likely to favour the UK.

“The defined contribution plans which have signed the compact will have agreed to try to target that investment into the UK economy, although some might consider that giving the money to a UK-based PE firm that then invests outside the UK as meeting the need,” he said.


Still, if pension funds favour the UK private equity market, creating a larger and more liquid sector, the UK could become more appealing to Asian institutional investors as well.

Among the UK’s investment management industry private equity currently comprises £420 billion, 3.8% of the £11 trillion total, according to the UK Investment Association.

Last year, global private markets – the majority of which is private equity – accounted for $11.7 trillion, 9.3% of the total global investment market of $125.9 trillion, according to McKinsey.

The compact marks a reversal for the UK pension fund industry - which has more than £2.5 trillion\ in assets, making it Europe’s largest – which has cut equity exposures heavily in recent years.  

Between 1997 and 2022 the proportion of UK pension asset invested in public and private equity fell from 74% to 27%, according to New Financial, a UK-based financial think tank.

Over that period the global average for pension schemes fell from 58% to 47%.

However, the compact is not binding and significant obstacles remain, according to Castledine. He says the government is consulting with the Local Government Pension Scheme, a defined benefit scheme and one of the UK’s largest pension schemes, which manages £342 billion ($436 billion) on behalf of 6.1 million members.

“It’s fair to say that not everyone is very happy about central government seeking to dictate portfolio construction for local authorities. So, the proposal is not yet embodied in regulations,” he said.  



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