Rethinking DC Default Strategies - The role of Private Markets

BlackRock see an emerging role for private markets in the UK Defined Contribution (DC) market and discuss the next steps for widespread adoption.

Most UK DC Schemes have, historically, invested predominantly in passive index strategies whereby the objective is to track their respective benchmark. Default strategies (where most of the members in a DC Scheme invest) generally invest either exclusively in, or have a very strong bias towards, public markets.

Given the shifting macroeconomic conditions and the increasing importance of sustainability, a growing number of DC schemes are looking to private markets for greater diversification and potential for enhanced risk-adjusted returns. Phoebe Nguyen, Head of UK Institutional DC at BlackRock, discusses the growing emergence of private markets in DC investment strategies and the potential benefits to Schemes and their members.

Shifting Markets

Since the Global Financial Crisis, markets have been defined by relatively stable growth and low inflation. The change in the market environment witnessed in 2022 suggests we are now in a new market era of macroeconomic volatility and DC Schemes need to take this into account for their default strategies.

The last 18 months have proven the need for Trustees to appropriately diversify their investment strategies to, ultimately, protect their members’ retirement incomes. Nguyen explains how private markets such as private equity, private credit, real estate, and infrastructure investments can offer valuable diversification compared to traditional public market exposures.

She says: “Real assets like infrastructure and property investments can provide stable cash flows and potential inflation linkage, making them attractive long-term prospects for retirement portfolios.”

Private markets can also provide a premium over public markets for certain investments. In addition, deals sourced through private markets can be undertaken with less competition, which provides for alpha seeking opportunities.

Investors, however, need to understand the risks relating to investing in private markets. They are not immune to market cycles and so portfolio construction is a critical component of a successful allocation to private market assets.


Private markets can also be used by DC Schemes in their sustainability journey. Since 2019, the DC adoption of Environmental, Social and Governance (ESG) investments has been wide-reaching. According to the DWP, from October last year, 80% of UK pension scheme members are invested in schemes that measure and publish how their investment supports the Paris Agreement on climate goals.1

Private markets can help support this transition while enabling investors the potential to earn attractive risk-adjusted returns. This makes private markets a valuable avenue for DC schemes looking to integrate sustainable principles and goals into their investment strategies.

Private assets can access certain investments not available in public markets and provide additional ways to increase the sustainable features of a portfolio. With private markets, investors have the opportunity to align to global trends such as the transition to a low-carbon economy, or invest in companies whose activities are aligned to sustainable themes spanning the UN Sustainable Development Goals (“UN SDGs”).


In the past, DC Schemes have faced many obstacles in terms of accessing private markets, including cost and operational difficulties such as daily dealing requirements. The UK government’s introduction of Long-Term Asset Funds (LTAFs), which are open-ended investment vehicles, give DC members new opportunities to invest in private markets by overcoming some of these historic challenges.

BlackRock’s Nguyen explains: “Until now, it was very difficult for many DC schemes to access private markets mainly because of the permitted link rules. LTAFs are regulated vehicles that allow DC schemes to access private markets through a single vehicle. Importantly, as LTAFs are open-ended, they can grow in line with members’ contributions and, therefore, we don't need to launch successive new funds as it grows.”

There is also a need to change perceptions of the relative value of introducing private market strategies. To help in this regard, there are several prospective regulations, notably the Value for Money framework, which aims to prioritise better outcomes and increase the value delivered to DC investors.

Nguyen says: “This is really important because it clarifies that investment decisions shouldn't be made simply based on costs but rather long-term returns, which plays to the strengths of private markets investing.”

The LTAF product design is also important as it needs to operate within the DC ecosystem which includes scheme trustees, investment advisors and platforms.

Additional work is also needed from asset managers to educate and support investors. Many trustees and schemes are unfamiliar with private market investments, leading to hesitation and uncertainty to investing in private markets.

In BlackRock’s case, they are addressing this by launching the Trustee Education Academy, which provides CPD-accredited training and thought leadership to trustees and in-house teams. This effort aims to educate trustees to make informed decisions.

Crucially, there will be no silver bullet for DC adoption of private markets. DC schemes have a long history of investing mostly in public markets and change will not happen overnight. However, Nguyen believes that the widespread adoption of private markets is only a matter of time. DC Schemes should look to improve outcomes for members by incorporating non-traditional asset classes into their default strategies.

She concludes: “We are still at the initial stage of the DC adoption of private markets. We believe that once it takes off, private market markets will be regarded as another type of asset class available for investing by DC schemes.”

Risk Warnings

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