Key Takeaways
- LTAF market expected to keep growing.
- Mansion House Accord commits pensions to private assets.
- Most UK pension saving won’t lead to a comfortable retirement.
- Asset managers can charge higher fees for more complex products.
The UK government believes increasing the exposure of retirement funds to private assets will boost returns, but experts also say it gives a “lifeline” for asset managers to charge higher fees for their expertise. And there are also concerns about how much risk pension savers auto-enrolled into default options will be exposed to as part of these reforms.
The Pension Schemes Bill was debated in parliament in early June, with a view to making the government’s Mansion House Accord reality. This compact, signed by the UK’s largest pension providers, commits them to investing 10% of their assets into private market assets by 2030.
This expansion of retirement funds is designed to “create bigger and better pension funds … drive costs down and returns up on workers’ retirement savings,” according to the government.
Dan Kemp, Morningstar’s chief investment and research officer, also says that these changes offer a commercial opportunity for under-pressure fund companies.
“Asset managers—who have seen their profit margins squeezed by the growth in passive investing—are likely to see this as a lifeline that provides an opportunity to charge higher fees for their expertise in opaque parts of the investing landscape."
Private Markets Increase Choice
Widening access to such markets could improve retirement savings and increase choice, the industry argues, but some investors won’t even be aware of what’s going on because their pensions are invested in default funds.
“As more companies choose to stay in private hands rather than become listed on the stock market, these new products add additional options for investors, widening the choice at the investment buffet,” says Morningstar’s Dan Kemp.
“While discernment is essential to investment selection, it is even more important when choosing products that are new, unfamiliar and more complex than traditional investment funds. This is especially true for investments in private assets as the outcomes vary more widely than those of funds investing in public markets.”
How Big is The LTAF Market?
A relatively new FCA-regulated fund structure, LTAFs were introduced in November 2021. Designed to offer easier access to longer-term illiquid assets like private equity, venture capital, and private debt, the strategies are in the spotlight as the UK government looks for ways of making auto-enrollment pension cash work harder for savers and the economy.
Morningstar analysts say the LTAFs market is currently relatively immature.
Having tracked growth in these products, they say there are currently around 30 such strategies available for sale in the UK, less than 1% of the broader family of 4,700 funds for sale in the UK overall.
“The LTAF coverage is still small but we expect it to continue growing,” says Evangelia Gkeka, senior analyst in Morningstar’s manager research team.
“Unsurprisingly, the LTAF market is dominated by large-scale asset managers such as Schroders, BlackRock, Aviva, Legal & General. They are now competing to capture a market share within the growing LTAF market.
“Given the complexity of LTAF strategies these require institutional-scale resources on the investment, research, risk and operational side.”
For investors, LTAFs can “bridge the gap” between liquid funds that offer dealing daily, and longer-term private structures. For investors who have played witness to the UK’s long-running saga over the gating of property funds, this may well be of real interest.
For its part, the government believes this level of flexibility—and the opportunities for scale afforded to the “megafunds” investing in these strategies—is good for the UK’s defined-contribution pension market.
“DC pension providers are the main target audience as LTAFs provide a more flexible access to private markets. DC schemes are also looking to increase their allocations to private markets,” Gkeka says.
“Wealth markets are also a target group, but progress has to be made in terms of platform availability of LTAFs for wealth investors.”
Asset Managers See This as a Business Opportunity Too
Commercially, the development also offers providers a significant business opportunity. That comes amid to a race to the bottom on fees accelerated by the astonishing success of passive investing via passive funds and exchange-traded funds in the US, UK and Europe.
As well as allowing fund managers to charge more, the changes will attract new entrants into this lucrative market.
“These new products bring new competitors—private asset firms that had previously been excluded from working with individual investors and financial advisors and are now expanding their reach," Morningstar’s Kemp says.
“It is therefore unsurprising that many traditional asset managers are exploring the partnership model rather than competing directly with these new entrants.”
How Are LTAFs Invested?
LTAFs come in all shapes and sizes. Some invest broadly across private credit, private equity, “real assets” such as commercial property, infrastructure debt and specialist credit. Others target specific investments in property or illiquid assets only, with 100% allocations to one asset class.
One strategy with a broad-brush approach is Future Growth Capital (Global Ex-UK LTAF) a commercial tie-up between the insurance and pension provider Phoenix and the asset manager Schroders. Launched in February 2025 with an initial £1 billion commitment from Phoenix, it is currently too new to have a performance track record. A UK-focused counterpart strategy is expected to launch later this year with the same asset allocation.
This strategy invests in private equity (35% of the portfolio), with other allocations to infrastructure equity (20%), corporate direct lending (15%) real estate debt (15%), infrastructure debt (10%) and specialist credit (5%). Investors can expect a redemption period of 90 days, far longer than most liquid open-end funds, which take days to redeem rather than months. Its management fee is 0.70% a year—cheaper than many funds, but significantly more expensive than the cheapest passive funds and ETFs.
For master trusts, a legal structure of pension strategy that accommodates the participation of several employers at once, these redemption risks are somewhat reduced.
“Master trusts who dominate shareholdings in an LTAF effectively have control over redemption risks,” says Morningstar analyst Daniel Haydon.
UK Pension Pots Are Not Big Enough
Are LTAFs the answer to unlocking growth in UK pensions?
Some suggest they are the right answer to the wrong question. What they want the government to focus on is how much the end investor actually saves under auto-enrollment.
According to the Pensions & Lifetime Savings Association, the annual income needed to maintain a “minimum” living standard for two people is currently £21,600. To be “comfortable,” a two-person household would require as much as £60,000 each year.
It’s not hard to see why some think higher contribution rates should be a policy priority.
How Auto-Enrollment Pensions Work
Currently, anyone aged 22 and above must be automatically enrolled into a pension upon starting a job. The earnings threshold to trigger this requirement is £10,000 a year, or £192 a week, or £833 a month. Employers must set the pension up within three months.
The minimum contribution made under auto-enrollment rules is 8% of qualifying earnings. This is typically split across a 5% employee contribution (4% from the saver and 1% from the government in tax relief) and 3% from the employer itself.
Qualifying earnings would typically mean anything earned between £6,240 and £50,270 for the 2025-6 tax year. An 8% contribution would mean that, in this framework, the maximum a person within this band, which ranges from low to middle incomes, could save per year is £3,533.40.
In a best-case scenario, saving from age 22 to the current retirement age of 66—a total of 44 years—that amounts to contributions of £155,469.
Assuming the power of compounding and investment returns is in the mix, the final “take-home” retirement pot could amount to several hundreds of thousands of pounds.
Even with a pot of £300,000, however, a retirement period of twenty years would not leave much of an annual income after tax: current annuity rates offer around £6,000-£7,000 a year in income for a pot of £100,000, so this notional pot would provide around £21,000 a year in income. This base case also assumes consistent returns and contributions, something made very difficult in a labor market where workers now change jobs frequently—and in an environment where inflation is running at 3.4%. It also excludes the impact of tax.
The “average” pension pot for all ages is currently much lower, around £20,000, according to PensionBee figures from 2024.
Are UK Pension Contributions Too Low?
“This wide-ranging [Pension Schemes] Bill is set to usher in the largest-scale pension reforms since auto-enrollment,” says Yvonne Braun director of policy, long-term savings at the Association of British Insurers, a trade body that represents insurance and pension providers.
“The details will be crucial and we will scrutinize the Bill to ensure it puts the interests of savers first. We also urgently need to tackle the level of pension contributions, which are too low to create an adequate retirement income for many. We urge government to set out the details of its adequacy review as soon as possible.”
A commercial opportunity for fund managers, then, but one for the end-investor to be mindful of as they take control of their retirement planning.
“As all visitors to a buffet know, simply because an option is available does not mean it should be added to your plate or will combine well with previous choices you have made,” Morningstar’s Kemp says.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar's editorial policies.
