Investment company Abrdn has called for further consolidation of the DC pensions market to invest in a wider range of asset classes that could support growth of the UK economy.

Abrdn said it believes that the case for consolidation in the DC market is sound and has been supportive of it in relation to private sector DB schemes.

It said there is a very long tail of small schemes that have neither the scale nor the expertise to make investment decisions on anything but the most “vanilla” of assets.

Consequently, consolidation is necessary to enable schemes to grow to a scale which enables investment in a wider range of assets with a greater appetite for rewarded risk. 

The company made the recommendations in its response to the Government’s Pensions Investment Review call for evidence.

The firm also said it is time for the introduction of financial incentives to encourage private investment to support UK growth – rather than mandating minimum allocations for pension funds.

It also said the Government should expand its areas of focus beyond venture capital and private equity to include smaller companies, private debt, real estate and infrastructure.

It said its proposals have the potential to deliver better outcomes for pension savers while also supporting the UK economy, for example in easing housing shortages and supporting the transition to a net zero economy.

However, Abrdn advised against mandating that pension schemes invest in specified assets or otherwise constrain investment choice as that would significantly interfere with their ability to meet the scheme’s objectives and deliver value for pension savers. 

 Tom Frost, head of UK institutional and global solutions at Abrdn, said: “The pensions reform agenda is an unparalleled opportunity to improve outcomes for current and future UK pensioners, while promoting UK economic growth and a fairer society.

“But while we need to see far more pensions diversifying into UK productive assets, a carrot is likely more successful than a stick. That’s because schemes are required to ensure that portfolios best meet their objectives and deliver for members, including from a cost benefit perspective.”

He said incentives could include a proposed value for money framework that encourages a re-interpretation of costs and the charge cap; fiscal incentives, including tax reduction or exemption for investments in productive finance; or underwriting or guaranteeing minimum investment returns.

Abrdn said it also supports the Pensions & Lifetime Savings Association’s suggestion to expand the area of focus beyond private equity and venture capital. It is calling on the Government to include in their definition of productive finance: private debt, smaller companies, infrastructure and real estate.

Nalaka De Silva, head of private market solutions at Abrdn, said: “By encouraging pension funds to invest more in private markets, we have the potential to deliver better long-term returns for savers.

“We should positively encourage them to invest into these areas – for example via tax breaks and other financial incentives.”