Aviva’s Groundbreaking Shift: Up to 25% Pension Funds to Enter Private Markets

Introduction

In a significant move for British pension savers, Aviva has announced plans to allocate up to 25% of pension pots to private market groups, including major firms like KKR and Apollo Global. This shift aims to enhance returns for millions of employees by increasing exposure to unlisted assets, marking a transition in pension management strategy.

The New Default Option: My Future Vision

Aviva, a leading manager of UK employers’ pension schemes, is rolling out a new default option named “My Future Vision” (MFV). This innovative plan is designed to elevate the allocation of an employee’s pension pot significantly:

• Initial Allocation: 25% directed towards private equity, private credit, infrastructure, and property
• Comparison to Existing Options:
  • My Future Focus (MFF): Next-tier allocation of 10%
  • My Future: No allocation to private assets

Why This Change Matters

Defaults in pension schemes are powerful nudges that influence clients’ decisions. While employees can opt out, historical data suggests that most do not, making the MFV default a potentially transformative step in pension contribution strategies.

Expected Benefits for Pension Savers

Aviva anticipates that this change will result in 5-6% of overall pots being directed specifically towards UK-based private equity and infrastructure. This strategy aligns with Aviva’s commitment under the Mansion House Accord, recently discussed with Labour’s Rachel Reeves.

High Potential Returns

As stated by Mai Rajah, Aviva’s director of investments, this new default is expected to offer higher risk-adjusted returns, a trade-off the company believes is worthwhile despite challenges like liquidity and higher fees associated with private assets.

Current State of Aviva’s Pension Management

With a robust asset base of £419 billion, Aviva stands as one of Britain’s leading managers of defined contribution (DC) pension schemes. This includes managing £15 billion for around 800,000 individuals enrolled in its auto-enrolment master trust.

Initial Focus on Trust-Based Schemes

For now, the MFV option will be available only to the £30 billion of trust-based schemes that Aviva manages. Nonetheless, Mai Rajah hopes to extend this approach to contract-based schemes in the future when regulations permit.

The Broader Shift in Investment Strategy

Other major firms, including Legal & General and Fidelity, are also exploring increased allocations to private markets in their DC pension funds. This shift reflects a broader trend where private assets are seen as essential for enhancing diversification and achieving strong returns.

Key Partners in Fund Management

Aviva has strategically aligned with reputable firms to manage these assets, including:

• KKR: Infrastructure investments
• Apollo Global Management: Private credit
• Neuberger Berman and Stepstone: Private equity allocations
• Invesco: Real estate assets

Risks and Considerations

Concerns from Financial Experts

While the move towards private assets promises higher returns, some financial experts caution against potential pitfalls:

• Historical Returns: The strong performance of private investments may not continue.
• Liquidity Issues: Private assets tend to be less liquid compared to traditional investments.
• Higher Fees: Investors may face increased costs that could eat into returns.

Government Perspectives

The government continues to argue that UK savers are compromising their long-term financial growth by predominantly investing in listed shares and bonds.

Potential Impact on Public Sentiment

The government has called for pension funds to allocate 5% of pots to UK private assets, drawing scrutiny from some analysts. They argue that it’s concerning to encourage public risk when government-backed pension systems remain guaranteed.

Summary of Changes

The MFV default structure foresees a 25% initial allocation to private markets, tapering to 20% by retirement age. The specific breakdown within this category includes:

• 35%: Private equity
• 25%: Private credit and infrastructure
• 15%: Real estate

Conclusion: A New Era for Pension Schemes

As asset allocation becomes increasingly vital in shaping retirement income and pot sizes, Aviva’s strategic shift towards private markets could redefine the landscape of pension management in the UK. Understanding these changes is essential for employees aiming for enhanced financial security in retirement.