UK pensions drive domestic private markets shift with innovative investment models

“It is like a juggernaut, and we’re trying to turn it around – move things in the right direction,” UK Chancellor of the Exchequer Rachel Reeves told investment firms at a private capital summit in London last September, framing a concerted push to reroute more retirement savings into domestic private markets. Behind that remark sits an active redesign of how defined contribution (DC) schemes, local government pools and other large UK allocators invest, a shift that is already reconfiguring private equity’s economics, product design and access.

The government’s agenda , from the 2023 Mansion House Compact to the 2025 Mansion House Accord , sets an explicit numerical aim: shift roughly 10 percent of DC default assets into private markets by 2030, with about half of that allocation directed at UK businesses. Officials and industry bodies argue that doing so could free tens of billions of pounds for long-term productive investment. According to a government paper on pension fund investment and the UK economy, mobilising more pension capital domestically is central to plans for supporting growth. The National Wealth Fund, seeded with £27.8 billion and established in 2024 from the UK Infrastructure Bank, has been presented as a complementary tool to attract private capital into priority sectors such as clean energy and advanced manufacturing, offering guarantees, debt and equity to make larger projects investable.

Yet policy ambition confronts a low starting point. Analysis by think tank New Financial, cited in The Actuary and in industry commentary, shows UK pension schemes allocate a much smaller share to domestic equities and unlisted companies than many peer systems, and that UK equity exposure has declined markedly over the last quarter-century. The Association of British Insurers’ monitoring, referenced by industry figures, found default DC funds’ allocations to unlisted equities remain tiny relative to the 5 percent target for 2030. That gap is driving investors to become active architects of the market rather than passive buyers of existing funds.

Product innovation is the first lever. The UK Long-Term Asset Fund (LTAF) framework , created in 2021 to allow open-ended vehicles to hold a majority of illiquid assets while offering enhanced liquidity management , has become the principal tool enabling DC platforms to host private market exposure. Asset managers including Schroders, Partners Group and BlackRock have launched LTAFs aimed at master trusts and workplace savings solutions. Schroders’ research finds a large share of DC schemes plan to access private markets through LTAFs, and a material minority expect to raise their domestic private markets weight substantially.

Leading master trusts and large workplace schemes are already translating that capability into commitments. NOW: Pensions, a £7 billion master trust and Mansion House Accord signatory, moved into UK affordable housing and plans a significant allocation to a Schroders Mercer LTAF this year. Nest, the £50 billion workplace pension, has expanded into private equity through bespoke open-ended structures and co-investment programmes and says it will not pay traditional performance fees for those arrangements. “Our PE portfolio is 100 percent co-investments… We don’t pay performance fees,” Amit Patel, senior investment manager for private equity at Nest, has said, highlighting how an influential UK allocator is enforcing alternative economics at scale.

Fee discipline is reshaping negotiation dynamics across the market. DC schemes operate within strict cost constraints , a statutory 0.75 percent charge cap and continued Value for Money scrutiny , which, together with governance and operational limits, mean managers seeking access to this source of capital must be prepared to meet much tighter commercial terms. That pressure is prompting some managers to standardise DC-compatible products, scale up to make lower fee models viable, or lean into differentiated strategies where higher fees can be justified. Industry leaders warn a singular focus on cost could concentrate flows with the very largest managers and squeeze out specialist mid-market managers that require smaller commitments and more diligence.

Scale is also being pursued through LGPS consolidation. The government’s plan to merge numerous local government pension funds into larger pools , described in reports as creating “megafunds” , aims both to reduce fragmentation and to deploy more capital into local productive assets. LGPS Central, which serves several Midlands authorities, expects assets under management to increase materially in the coming months and to hold more than £25 billion in private markets after recent transitions. Nadeem Hussain, head of private markets and real assets at LGPS Central, says increased scale allows the pool to develop meaningful, long-term partnerships and to build in-house capabilities capable of executing direct investments and complex fund programmes.

That pooling agenda has political and industry backing. An Associated Press summary of government plans noted the objective to unlock roughly £80 billion for investment by merging 86 local authority funds, and S&P Global reported similar aims for channelling allocations into private equity via consolidated pools. At the same time, the Investment Association has described pension reform as a necessary foundation for better retirement outcomes and broader investment flows, urging a cooperative approach between government and the asset management industry.

Even as UK allocators push for more domestic investment, many adopt a conditional position on home bias. Managers and pension officials repeatedly stress that UK exposure should not come at the expense of diversification or returns. Schroders’ polling of DC schemes found most respondents do not favour investing the majority of private markets allocations in the UK, and many cite a shortage of suitable domestic opportunities as a principal barrier. That shortage has prompted calls for complementary measures , including, by some observers, transaction-cost subsidies or targeted support similar to development finance models , to help build a pipeline of investible UK companies and projects.

Investors are also redefining what ‘investing in the UK’ means. For LGPS pools and large DC investors, domestic allocations might be pursued through blended structures that mix private equity, infrastructure and liquid sleeves, or by building specialist domestic sleeves that only make economic sense at scale. Jaime Alvarez, senior portfolio manager at Brunel Pension Partnership, notes that size can make it feasible to underwrite dedicated UK small- and mid-cap programmes that would be impossible for smaller pools.

The market consequences are already visible. Increasing DC flows into private markets will raise capital supply to illiquid asset classes, potentially compressing valuations in competitive segments while broadening co-invest opportunities and secondary-market liquidity over time. It will also force managers to demonstrate discipline on valuation, fee arrangements and reporting. UK Private Capital’s chief executive Michael Moore cautions against a blunt ‘cheque-size’ mentality that risks excluding smaller, specialist managers and thereby undermining the diversity of strategies that support a healthy private capital ecosystem.

Public-sector initiatives are intended to ease those frictions. The National Wealth Fund’s mandate to crowd in private capital using guarantees and co-investment structures aims to lower risk for large projects that private investors might otherwise bypass. Emily Sidhu, managing director at the fund, has described its role as working alongside pension funds and managers to provide instruments such as credit enhancement guarantees to make large infrastructure and industrial projects investable.

If investor-led redesign succeeds, the consequences would be twofold: millions of DC members could gain indirect access to private markets through workplace default funds, and the economics and architecture of private equity might evolve towards lower-cost, more transparent, and platform-friendly models. Yet success is not guaranteed. Policymakers, pools and asset managers must simultaneously expand the investible pipeline, preserve diversity among managers, and ensure that member outcomes remain central rather than subordinated to a narrow domestic-investment target.

The UK’s experiment is therefore more than a capital-raising exercise; it is an active remodelling of the supply chain for private capital. By demanding different vehicles, tighter fee terms and deeper reporting, large domestic allocators are exerting influence that could reshape fund structures internationally. Whether that influence produces durable improvements in retirement outcomes and domestic growth will depend on execution: creating viable products, cultivating pipeline and maintaining the governance that protects savers while enabling long-term investment.