Exclusive-Top UK pension fund Nest expects to lift private assets to 30% of holdings

By Naomi Rovnick and Carolyn Cohn

LONDON (Reuters) - Nest, a 36 billion pound ($45 billion) UK workplace pension fund, expects to ramp up private assets holdings to as much as 30% of its portfolio, in one of the most significant moves into alternative investments by a large UK retirement scheme.

Stephen O'Neill, head of private markets at Nest, Britain's biggest defined contribution pension scheme, said allocations to private equity and other illiquid assets were likely to "get up towards 30%" over the coming years.

Nest's current exposure to private assets is almost 15% and the plan is to double this target, reflecting growth opportunities the group sees in assets including private credit, infrastructure and sustainable assets, O'Neill told Reuters.

Nest would likely invest up to 600 million pounds in global timberland this year, expecting annual returns ranging from 6% to more than 10% by location, he added.

About 70% of UK defined contribution funds, the private pension schemes set up by employers or individuals, plan to raise their ownership of illiquid assets such as private debt and forestry within three years, a recent Aviva Investors report found.

The move comes after the UK government relaxed rules for these schemes on member charges and has pressed them to support start-up companies.

According to the Pensions and Lifetime Savings Association, defined contribution pension schemes hold just 3% of their portfolios in alternative assets. Britain has more than 3,000 defined contribution schemes operating with about 600 billion pounds in total assets, Citi estimates.

Some experts have questioned if pension managers fully understand the risks of holding illiquid assets, which can be costly to invest in and take longer to sell than stocks and bonds. The UK's financial regulator is probing private asset managers' valuation techniques.

"This shift of pension schemes into unlisted equities, unlisted debt and illiquid assets might inflate a bubble," said Tom McPhail, pensions specialist at public affairs consultancy Lang Cat.

A survey by investment group Downing found 94% of UK pension providers want more exposure to private credit, the non-bank lending sector that has boomed to around $1.8 trillion globally and which the Bank of England has identified as a systemic danger.

Cushon, a 2 billion pound UK workplace pension provider, aims to increase its private markets exposure to 15% of its main fund from 5% currently, CIO Marc Barnett told Reuters, aiming for returns of up to 10% a year.

A global equity and bond selloff in 2022 as inflation and interest rates soared, which also saw UK pension funds caught out by a UK gilts rout, showed the value of private assets to "offer protection in those horrible years," Barnett said.

Paul Bucksey, chief investment officer of workplace pension provider Smart Pension, said the group's main fund would make a new allocation of 5% to unlisted equities in 2024, taking private market exposure to 15%.

Defined contribution pension scheme members can transfer their pots between providers, meaning managers should understand the risks of tying up too much cash in hard-to-sell private assets, Nest's O'Neill said.

He added, however, that private markets offered "higher expected returns" while publicly traded stocks and bonds were "only a very small part of the investable universe."

(Reporting by Naomi Rovnick and Carolyn Cohn; Editing by Dhara Ranasinghe and Hugh Lawson)