UK DC pensions: Property’s defining moment

Research shows there is an important role for real estate in UK DC pension schemes, despite structural barriers to growth. Gail Moss reports 

With the introduction of auto-enrolment, and the continuing decline of defined benefit (DB) pension schemes, the UK’s defined contribution (DC) market is growing rapidly. 

According to a new report commissioned by the Investment Property Forum (IPF), the UK DC market has £338bn (€382bn) in assets, which is expected to grow at 10% annually over the next 10 years, reaching £871bn by 2026.

The report, The State of Play in Property investment in UK DC, was produced by Broadridge, which has carried out research on the DC market since 2010. 

It estimates that 1.8% of workplace DC assets, including those of smaller schemes, are invested in property. This is predicted to rise to 5.4% by 2026. In monetary terms this means an increase from £6.2bn-worth of property assets in workplace DC schemes today, to £47bn in 2026, with most of the assets in master trusts.

Magnus Spence, managing director of global distribution solutions at Broadridge, part of the team on the project, estimates that 30% of workplace DC schemes invest in property presently; he expects this to grow to 40% in 10 years’ time, held both through property and multi-asset funds. 

“The main reason why schemes will not invest in property, or will not increase their investment at present is the lack of liquidity,” he says. “It has been clear for some time that the barriers to illiquid investments are structural, and not regulatory.”

Most DC schemes are too small to consider holding property, because of its lack of liquidity. Where small or medium-sized schemes do invest, it is mainly through real estate investment trusts (REITs) or other daily traded pooled funds. Direct property holdings tend to be the preserve of the largest pension funds.

Spence says: “Another reason making property investment difficult is that, while investment decision making is in reality made on most individuals’ behalf through careful design of default funds by scheme sponsors and trustees, it is still the case that, technically, each DC pension pot is separate and belongs to an individual. So it’s more difficult to think about investing in illiquid assets. And there is no risk-sharing mechanism as there is in DB schemes.” But with the total asset value of workplace funds set to rise sharply, the value of property investing by these funds is expected to rise as well.

Greg Mansell, chair of the IPF’s project steering group, which oversaw the study, says: “The industry needs to communicate the benefits of real estate investment to defined contribution pension fund trustees. As a starting point, we need to understand the scale of current exposure to the asset, which Broadridge has shed light on, as well as identifying the opportunities to expand this.”

The IPF research programme, which funded the investigation is financed by a cross-section of 22 businesses, representing key market participants. The full report will be available to download from the IPF website later this year.