Key Takeaways
- • Neuberger Berman modelled two hypothetical 40-year DC glide paths, one with traditional equities only and one substituting part of the equity allocation with private equity, to assess the asset class's potential impact on DC outcomes.
- • The study finds that private equity's higher risk-adjusted return profile improves both mean return and the range of outcomes in a Monte Carlo simulation of 10,000 hypothetical return paths.
- • Neuberger Berman concludes that the potential return benefits would more than offset the higher fees associated with adding private equity.
- • Higher projected wealth accumulation would support the purchase of a larger annuity stream, increasing potential retirement income.
- • Product innovations and regulatory changes are reducing barriers, such as the UK fee cap, regulation, and liquidity constraints, that have historically limited private equity use in UK DC schemes.
Summary
Neuberger Berman argues that private equity merits renewed consideration by defined contribution (DC) schemes, particularly in the UK, where inclusion has historically been limited by structural factors including the fee cap, regulation, and liquidity. The firm contends that recent product innovations are reducing these barriers, and that the asset class's appealing risk-return characteristics, which are well suited to the long-term horizon of pension investors, warrant a fresh look.
To test the proposition, Neuberger Berman modelled two hypothetical DC portfolios over a 40-year glide path. The first holds only traditional equities. The second substitutes part of the traditional equity allocation with private equity. According to the firm, the higher risk-adjusted return profile of private equity improves both the mean outcome and the range of hypothetical portfolio returns in a Monte Carlo simulation of 10,000 scenarios, with results shown at the median, 10th and 90th percentiles.
The analysis indicates that these potential advantages would more than overcome the additional fees associated with private equity. The resulting higher wealth accumulation would, in turn, allow members to purchase a larger annuity stream at retirement, increasing potential retirement income.
The publication emphasises that these findings are hypothetical, do not reflect actual investment results, and are not guarantees of future performance. Assumptions are subject to change without notice. The article also highlights differing investment management approaches to private equity and the considerations DC schemes should weigh when selecting an investment partner.
To test the proposition, Neuberger Berman modelled two hypothetical DC portfolios over a 40-year glide path. The first holds only traditional equities. The second substitutes part of the traditional equity allocation with private equity. According to the firm, the higher risk-adjusted return profile of private equity improves both the mean outcome and the range of hypothetical portfolio returns in a Monte Carlo simulation of 10,000 scenarios, with results shown at the median, 10th and 90th percentiles.
The analysis indicates that these potential advantages would more than overcome the additional fees associated with private equity. The resulting higher wealth accumulation would, in turn, allow members to purchase a larger annuity stream at retirement, increasing potential retirement income.
The publication emphasises that these findings are hypothetical, do not reflect actual investment results, and are not guarantees of future performance. Assumptions are subject to change without notice. The article also highlights differing investment management approaches to private equity and the considerations DC schemes should weigh when selecting an investment partner.
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