Smoother sailing: how private markets can help DC savers weather market storms
Private market investments are noted for their potential to generate higher long-term returns, but they can also play a role in smoothing out portfolio volatility, thereby improving the journey to retirement for DC scheme members.
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In our previous article, we explored how private market investments could help improve retirement outcomes for defined contribution (DC) savers. Specifically, we introduced Lucy, a new starter at a hypothetical company that is evolving its default DC investment strategy to include a 10% allocation to private markets, achieved by adding a multi-asset long-term asset fund (LTAF).
Our projections showed how this modest allocation, based on average returns for the LTAF landing in the mid-point of its target, could boost Lucy’s retirement pot by £27,000 in aggregate net of fees, which would increase her retirement income by £2,200 annually.
But while retirement income is the ultimate goal, the journey to get there matters too. In this second article we will take a closer look at the experience DC members have along the way, with a focus on the potential impacts of market volatility that has become a defining feature of the investment landscape in recent times.
Market volatility is an inescapable reality over any long-term investment horizon at any point in the economic cycle – and it can have a lasting impact, not just on members’ outcomes, but on their confidence, engagement and decision-making. Private markets could play a key role in smoothing the investment journey for investors and helping them to weather market storms.
Why volatility matters
For DC savers, volatility isn’t just a technical concern, it’s a psychological one. Sudden market downturns could trigger anxiety and lead to members making decisions to switch out of investments at the worst possible time, without fully considering long-term outcomes. This can lock in losses and impact long-term goals.
There’s a structural concern too: large drawdowns early in a member’s investment journey can have a disproportionate effect on final outcomes, especially if members reduce or stop contributions in response to market stress.
The Pensions Regulator has recognised this, encouraging schemes to monitor risk factors and ensure their investment strategies remain suitable in a changing market landscape. Trustees are also expected to help members make informed decisions through timely and transparent communication during periods of volatility, which has notably increased this year amid ongoing geopolitical upheaval.
Private markets and volatility
Private market assets – ranging from private equity to real estate, infrastructure, and private credit – are known for their potential to generate enhanced returns relative to public market equivalents. But they can also be a way to lower the overall volatility of a portfolio, as well.
Partly this is a function of diversification. Adding private markets to a portfolio mostly allocated to public stocks and bonds introduces new drivers of returns and performance. Moreover, private asset classes typically exhibit low correlation to public markets, as we have shown previously, meaning performance often diverges from what is happening in the public portion of a portfolio.
This differentiated performance is a result of several factors. On one hand, for example, private market assets are typically valued less frequently than public market assets, often on a quarterly basis. This infrequent pricing means they don’t react to short-term noise in the same way that listed equities do, resulting in a natural smoothing of returns.
Moreover, private market performance depends more on the long-term fundamentals of the underlying assets, and the long-term commitments being made. Put simply, these investments can command strong returns in return for capital being tied up for longer (the ‘illiquidity premium’), and reflecting the skill of specialist managers who source, negotiate, execute and manage bespoke and bilateral deals relating to individually unwritten, unlisted businesses and assets (the ‘complexity premium’).
Highlighting the volatility dampening potential of private market investments, a recent research study by Schroders Capital shows that private equity outperformed public markets by an average of 4% p.a. net over the 25 years from 1999-2024. Crucially, outperformance doubled during the five key periods of market stress in that period.
Private equity has outperformed public markets over the past 25 years…
… and that outperformance was twice as high during market disruptions
Past performance is not a guide to future performance. Source: MSCI (Burgiss), LSEG, Schroders Capital, 2024. 1MSCI’s Burgiss Global Private Equity Funds Index is a capitalisation-weighted index consisting of Buyout, Venture Capital, and Growth funds. The performance figures are based on pooled quarterly time-weighted returns in $, net of all fees to Limited Partners. 2Simulated performance without crises assumes periods with market disruptions are excluded. The CAGR is calculated over a shorter effective period to reflect the removal of these periods. Market disruption periods: Dotcom Crash from June 2000 to March 2003; Global Financial Crisis from December 2007 to March 2010; Eurozone Crisis from March 2010 to March 2012; Covid-19 Outbreak from December 2019 to September 2020; Return of Inflation from December 2021 to December 2022.
Keeping Lucy’s money safe
Let’s return to Lucy. As highlighted above, the change to the default investment strategy, adding a 10% allocation to a multi-asset private markets LTAF, was projected to increase her retirement income by over £2,200 annually. But how could it affect her investment experience and volatility during the journey?
By looking at real performance data from the real world LTAF used in this example, we can see that the private portion of Lucy’s portfolio would have experienced significantly lower drawdowns during recent crises over the past 10 years (namely, the outbreak of Covid in 2019/2020 and the market response to the Russian invasion of Ukraine in 2022, which triggered a surge in inflation and global interest rate hikes).
Specifically, the LTAF saw a much lower maximum drawdown (drop) during both of these periods, 13% and 10% lower respectively, which would have limited investment losses during those periods. This means more of Lucy’s money would have remained in the pot and so benefitted from cumulative growth in the years that followed.
Of course, past performance is not a guarantee of future results, but this highlights the potential difference that could be made by including private markets investments. In practice and in this example, it would have meant enhanced downside protection, better long-term outcomes and increased stability overall, improving Lucy’s experience as an investor.
Private markets LTAF saw lower drawdowns during periods of market stress
Source: Schroders Capital, 2025. Refinitiv, Global Equity drawdown based on MSCI ACWI (GBP). Maximum drawdown is defined as the maximum loss from peak to trough before a new peak is attained. Multi-asset LTAF drawdown data is a backtest using Schroders strategies for infrastructure and private equity, based on the midpoint of the strategic asset allocation of the fund.
Considerations for DC investors
Despite these potential benefits, the inclusion of private assets in DC portfolios can raise questions around transparency, liquidity and valuation lags. These are valid considerations and must be carefully managed.
Private market investments are less liquid by nature, meaning capital is typically tied up for longer periods. But in a DC default strategy – especially in accumulation – this long-term horizon can be an advantage rather than a drawback, giving investors the opportunity to access the potential illiquidity premium. Similarly, while valuation lags can mask the true volatility of private assets, this characteristic can also serve to smooth returns and reduce portfolio churn.
What is critical is that trustees and managers have robust governance, valuation oversight, and clear communication practices in place to ensure members understand the role and characteristics of these investments. Similarly, private markets investments should be considered and implemented as part of a holistic investment strategy, in line with overall liquidity budgets.
Regulatory frameworks now increasingly support the inclusion of private assets within DC strategies, provided they are implemented as part of a well-diversified, risk-managed, and appropriately governed solution.
Improving the member experience
Smoothing volatility isn't just about numbers; it’s about confidence. Members who see steady performance are more likely to stay the course, remain engaged with their savings, and trust in the plan designed for their retirement. In turn, this can help schemes reduce the risk of poor decision-making and support improved outcomes over the long term.
Schroders’ 2025 Global Investor Insights Survey shows that portfolio resilience is now the number one priority for institutional investors. In an environment shaped by protectionist trade policies, geopolitical uncertainty, and volatile public markets, these investors are actively turning to private markets as part of a more resilient investment framework, in order to source differentiated return opportunities.
In the context of DC schemes, introducing private markets isn’t therefore just about chasing higher returns, it’s about delivering a better overall member experience. With the right implementation, these assets can offer a dual benefit: enhancing projected retirement income, while also smoothing the investment journey along the way.
In a future article in this series, we’ll explore how making private market investments more tangible to members – by showcasing their real-world impact – can further enhance engagement and trust.
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