Executive Summary
It’s getting harder for UK defined contribution (DC) savers to accumulate realistic amounts of capital for their retirement. Prospective real returns from most asset classes look unlikely to match those of recent years. And the cost-of-living crisis is making it harder for savers to maintain their current pension contributions, let alone increase them in future. How can DC savers get ahead?
At AB, we believe that allocating to private assets can help make a meaningful positive difference to DC savers’ returns over time. As long-term investors, DC savers can and should benefit from the additional returns associated with the illiquidity premium, in our view.
In this paper, we address private assets with a focus on private credit. Specifically:
- we set out the practical problems with and hurdles for DC savers investing in illiquid assets and explain the solutions we have developed for investors in our own DC target date funds (TDFs). These funds already include allocations to private equity and sustainable infrastructure. We explain how we have built on that experience to enable us to allocate to private credit too.
- we show why and how DC portfolios can allocate to this asset class, and we assess the value such an allocation can add in terms of members’ annual returns and compound growth in capital over time.
- we illustrate how DC private credit allocations can be tailored to meet the needs of specific age groups at realistic fee levels.
To overcome the challenges of investing DC savings in private assets, it’s essential to use appropriate investment vehicles. Throughout the paper, we show how TDFs can incorporate complex asset classes while remaining simple for fiduciaries to use and easy for members to understand.
