Illiquid asset investments: can the UK emulate Australian superannuation?

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Australian superannuation is sometimes cited as a model that the UK might seek to emulate in order to generate larger investment returns. But is it really that simple?

Increasing investment in illiquid assets has been widely discussed in the UK pensions industry. 

In July 2023, the chancellor of the exchequer used his “Mansion House reforms” speech to outline his desire to boost the UK economy by channelling pensions savings towards these potentially higher growth assets, while pushing smaller funds to consolidate in the hope this will make them more efficient.  

But can the Mansion House reforms really unlock £75 billion from pension funds, as suggested in the chancellor's speech? And what challenges need to be overcome between now and 2030 if these aspirations are to be realised? 

To apply an international lens to these issues, we spoke to Paul Watson, one of Australia’s leading pension experts. 

Paul has held senior executive positions in several of Australia’s best performing superannuation and pension funds, including Hostplus, Military Super and Australian Reward Investment Alliance.
 

Private assets 

In Australia, superfunds dominate, illiquid investments are more common and average pension returns are higher.

The inclusion of private assets in portfolios has, over a lengthy period, been shown to deliver optimal risk-adjusted net benefit outcomes for members. 

Today, Australia’s larger superannuation funds invest around 30% of their assets in private assets, including property, infrastructure, private equity and credit, and venture capital. 

However, this didn’t happen overnight. In fact, the Australian experience suggests some foundations need to be put in place first if the UK wants to emulate this investment approach, says Watson. 

UK pension schemes will also be far from alone in looking for high-quality, long-term capital investment opportunities, both within the UK economy and further abroad, notes Watson.

“In terms of illiquids, there is a lot of money chasing not very many top-shelf opportunities globally. This competition is only likely to increase. In addition, most funds, once invested, are likely to hold onto the best of these core opportunities and investments for decades.”

Unlisted assets are sometimes maligned, but this is the wrong characterisation, believes Watson. 

“Unlisted assets comprise the majority of the world’s investable assets, so for a pension fund to avoid them and only consider listed markets is something of a constraint on a fund’s opportunity set. 

“What’s important is how such assets are thoughtfully blended within a fund’s strategic asset allocation and associated risk budget,” said Watson.

 

Steps to success 

So, what factors might be required to execute the Mansion House Compact strategy regarding illiquid/unlisted assets? Watson considers the following factors important:

• A skew towards young member demographics – which can leverage long-term capital investing, often for decades to come
• Large and positive net cashflow – providing the deployable investment firepower to take advantage of tier-one investment opportunities
• Scale – either within the fund or in tandem with co-investors – to negotiate better fees and terms, and transact more efficiently in markets
• Tolerance of illiquidity – a capacity and appetite to tolerate illiquidity within the fund’s strategic asset allocation
• Resilient investment beliefs and strategy – to quickly recover from adverse market events
• Robust investment beliefs and philosophy – to actively identify, secure and actively manage unlisted assets

“It’s probably not necessary that a fund have all these ingredients in order to blend public and private asset allocations to deliver optimised, risk-adjusted returns. 

“But the more it has in place or is achievable via joint ventures and partnerships with like-minded investors, the more likely that this approach will be successful.”
 

 

Next steps

Read more about what the UK can learn from Australian’s superannuation system here:

Pot for life: lessons from Australia’s stapling model

Value for money: what can the UK learn from Australia?

 

The opinions expressed in this document do not necessarily reflect the views of Standard Life.