Top 100 asset allocation analysis: Pension funds are increasingly turning to illiquid assets in search of higher returns

“Returns are still important to most pension schemes in order to close funding gaps,” says Kathryn Koch, head of Global Portfolio Solutions International at Goldman Sachs Asset Management.

“While the top 100 pension funds turned to equities in 2013, in our clients’ portfolios we have allocations to a wider range of return generating assets, such as alternatives, credit, and real assets.”

Schemes are also becoming more comfortable with investing in private equity, which can allow them to make the most of their comparatively long time horizons and earn an illiquidity premium.

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Private equity is becoming more mainstream, which helps explain why the top 100’s collective allocations jumped from £8.9bn in 2012 to £11.4bn in 2013. In particular, local government schemes can benefit from this because they are open and will keep bringing in new assets and new liabilities.

“We’ve recently changed our benchmark asset allocation and are moving more of our funds into illiquids,” says Susan Martin, chief executive of the London Pensions Fund Authority.


Infrastructure is one such illiquid class that has received particular attention.

The government has been encouraging pension schemes to invest in this type of project as they have access to some of the country’s largest financial reserves. Ultimately, of course, the purpose of a defined benefit pension scheme is to provide members with a retirement income, rather than to meet other social or political goals, so schemes should only look at infrastructure if they believe it will enhance their financial returns.

Allocations to infrastructure seem to have taken off

Allocations to infrastructure seem to have taken off, with some schemes making significant investments in 2013. Individually reported allocations went up from £492m in 2012 to £26.9bn in 2013. Some pension funds will simply have included infrastructure within a single “alternatives” class for the purposes of reporting, so this leap may be less staggering than it appears.

Scheme size is often a limiting factor when it comes to infrastructure, which is why it is particularly the domain of the schemes with the UK’s largest pots. They are also more likely to have the internal expertise to be able to manage direct infrastructure investment, rather than accessing this asset class through corporate bonds sold by, for example, energy or utilities companies.

USS made a £2.7bn infrastructure investment in 2013

The UK’s very largest scheme, the Universities Superannuation Scheme, made a £2.7bn infrastructure investment in 2013, which hadn’t been reported in 2012. Meanwhile, the Pension Protection Fund increased its infrastructure allocation from £33.4m to £59.3m.

It is perhaps unsurprising that the PPF is enthusiastic about this type of investment, given its involvement with the Pensions Infrastructure Platform, which was designed to provide the economies of scale needed to give more pension schemes access to infrastructure.


Private equity and infrastructure are just two of the alternative asset classes that schemes are increasingly considering in their widening search for yield.

Although the overall allocation to alternatives went down very slightly (0.22%), they remained at around 4% of the top 100 schemes’ total investments.

Less sophisticated investors with fewer resources would have tended to stay more in equities and have less diversified portfolios, so the spread of alternatives is a feature that is arguably specific to the largest schemes, which is why it is so apparent in the top 100.

They are the biggest and best-equipped pension schemes in the UK, which is why other schemes should learn from their approaches, but also bear in mind that scale and resources will have a significant impact on the viability of certain investment strategies.

For now it seems that schemes will be maintaining their equity allocations, waiting for bonds to yield better returns, and increasingly seeking diversifiers.