Key Takeaways
- • UK pension schemes allocate nearly 24% of total assets under management to alternatives, according to Preqin data, exceeding their allocation to public equities at 19%.
- • Local government pension scheme (LGPS) funds collectively hold £99.6bn in alternatives, marginally above their £97.1bn target allocation across 86 constituent funds.
- • Real estate and infrastructure represent the highest-targeted alternative asset classes within UK pension portfolios, demonstrating institutional preference for tangible assets.
- • Eighty percent of institutional investors maintain allocations to at least one alternative asset class, with more than half diversified across three or more alternative categories.
- • The global alternatives industry is projected to expand from $12.5tn in assets under management in 2020 to over $20tn by end of 2025, driven by sustained institutional demand.
Summary
UK pension schemes have significantly increased their exposure to alternative investments, with allocation levels reaching nearly a quarter of total assets under management, according to data published by Preqin. This 24% allocation to alternatives now exceeds the proportion dedicated to public equities, which stands at 19% of AUM, signaling a structural shift in institutional investment strategy toward non-traditional assets.
Local government pension scheme (LGPS) funds, which represent a substantial component of UK pension capital, currently maintain £99.6bn allocated to alternatives across 86 constituent funds. This figure slightly exceeds the combined target allocation of £97.1bn for these funds, indicating that LGPS managers are meeting or approaching their strategic benchmarks for alternative exposure. Among alternative asset categories, real estate and infrastructure have emerged as the primary focus areas for UK pension allocators, reflecting institutional preferences for yield-generating tangible assets with inflation hedging characteristics.
The trend toward alternative allocation extends beyond UK pension funds and reflects broader patterns among institutional investors globally. Preqin's research indicates that 80% of institutional investors maintain allocations to at least one alternative asset class, while more than half have diversified their exposure across three or more alternative categories. This diversification strategy underscores the maturation of the alternatives market and its integration into mainstream institutional portfolios.
The growth trajectory for the alternatives industry remains robust, with global assets under management projected to expand from $12.5tn in 2020 to exceed $20tn by the end of 2025. This expansion is underpinned by sustained capital flows from pension funds, family offices, and other institutional allocators seeking enhanced returns and portfolio diversification in an environment of persistently low public market yields. UK pensions' elevated allocation to alternatives positions them to capitalize on this secular growth trend while balancing risk through exposure to diversified alternative strategies.
Local government pension scheme (LGPS) funds, which represent a substantial component of UK pension capital, currently maintain £99.6bn allocated to alternatives across 86 constituent funds. This figure slightly exceeds the combined target allocation of £97.1bn for these funds, indicating that LGPS managers are meeting or approaching their strategic benchmarks for alternative exposure. Among alternative asset categories, real estate and infrastructure have emerged as the primary focus areas for UK pension allocators, reflecting institutional preferences for yield-generating tangible assets with inflation hedging characteristics.
The trend toward alternative allocation extends beyond UK pension funds and reflects broader patterns among institutional investors globally. Preqin's research indicates that 80% of institutional investors maintain allocations to at least one alternative asset class, while more than half have diversified their exposure across three or more alternative categories. This diversification strategy underscores the maturation of the alternatives market and its integration into mainstream institutional portfolios.
The growth trajectory for the alternatives industry remains robust, with global assets under management projected to expand from $12.5tn in 2020 to exceed $20tn by the end of 2025. This expansion is underpinned by sustained capital flows from pension funds, family offices, and other institutional allocators seeking enhanced returns and portfolio diversification in an environment of persistently low public market yields. UK pensions' elevated allocation to alternatives positions them to capitalize on this secular growth trend while balancing risk through exposure to diversified alternative strategies.
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