Rosalind Evans
The UK’s pension landscape is transforming as funds hurry to sell off unlisted assets, occasionally at significant markdowns. This rush is primarily attributed to their overexposure to the opaque $12 trillion global private market. As regulators scrutinize the actual worth of diverse investments ranging from real estate to private equity, there are growing concerns about the accurate valuation of these assets.
Global regulatory bodies are expressing concerns over the value of private market assets and substantial infrastructure projects. While listed markets, including bonds, have experienced dramatic downturns due to rising borrowing costs, the valuations of these personal assets still need to be made public. The defined benefit pension fund sector, valued at 1.5 trillion pounds ($1.8 trillion), felt the repercussions intensely, instigating a UK market sell-off just last year.
For these pension providers, which assure guaranteed incomes for retirees, the pressing issue is the significant discounts at which they sell assets like office blocks and private equity stakes compared to their recorded book values. The UK’s Financial Conduct Authority is among the regulators becoming increasingly wary. It plans to review the valuation methods for private assets, mainly focusing on the potential risks of over-valuation and its subsequent impact on banks.
The challenge is evident in the real estate, where commercial transactions are dwindling. Con Keating of Brighton Rock Group remarked on the situation, stating, “There’s been very little marking down of (private) assets,” and deeming it “cloud cuckoo accounting.”
Moreover, with bond yields nearing pre-financial crisis levels, overexposure to such illiquid assets might render pension funds cash-strapped in potential crises. Henry Tapper of AgeWage states that the uncertainty surrounding private market valuations is causing unrest. EY’s UK head of pensions consulting, Paul Kitson, highlighted the urgency as UK pension funds let go of illiquid assets at discounts reaching 40% of their book values.
Beyond real estate, the private equity sector is also under the microscope. Recent transactions in the industry reflect valuations significantly below their reported worth. Personal equity stakes, for instance, are trading at roughly 85 cents on the dollar in the secondary market since early 2022, noted Wilfred Small from Ardian.
The trend and concerns surrounding unlisted assets in the UK pension fund sector are a testament to the need for accurate and transparent valuation practices. As global markets evolve and financial landscapes shift, it becomes crucial for regulatory bodies and industry stakeholders to ensure stability and trust, especially when it concerns the retirement futures of many.
