Legally bold? A lawyer’s lens on “alternative investments” for pension schemes

In this article we delve into the dynamic and fast-evolving world of alternative investments for pension schemes, offering a legal lens on trustees’ duties when considering their investment options. 

As usual, trustees should ensure they seek professional investment advice. This article does not constitute investment advice or any form or recommendation, and all parties must take full and appropriate advice in relation to any investment.

Overview

Alternative investments – broadly, allocations to assets outside of traditional bonds and listed equities – are playing an increasingly prominent role in UK pension scheme portfolios.

Trustees may be considering these investments where appropriate amid an evolving environment and it is worth taking a step back before we get into the detail of alternative investments to briefly consider the wider picture.

In particular, trustees will need to consider factors such as changing market conditions, defined benefit (DB) scheme maturity and journey planning and defined contribution (DC) focused initiatives such as the Mansion House Compact and Accord, which encourage greater investment in private markets. By virtue of the Pension Schemes Act 2026 (which received Royal assent on 29 April 2026), the Government now has a so-called “backstop” power to mandate that certain DC schemes invest in a certain way. Badged as a measure of last resort, the Government has said that it is intended to be used only if the voluntary commitments given in the Mansion House Accord to allocate more assets to productive finance fail to deliver the shift in investments the Government is seeking.

In addition, following industry calls for clarification of trustee fiduciary duties in relation to pension schemes investments, it was anticipated that the Pension Schemes Act could include enabling provisions to require the Secretary of State to issue guidance for pension scheme trustees. The explanatory notes accompanying the amendments said that the guidance may, in particular, explain the meaning of phrases used in the Investment Regulations. However, the provisions did not make it into the final Act (with the House of Lords voting narrowly against incorporating the amendments). On 22 April 2026, Pensions Minister Torsten Bell said that the Government would ‘proceed’ on work to draft the guidance and that the ‘technical working group is well underway and is doing good work to provide clarity to the industry’. We are therefore watching this space with interest.

Therefore, the subject of pension trustee investment duties is likely to be an area of focus in the years to come.  You can read more about investment mandation and statutory investment guidance in our Pension Scheme Act handbook here (pensions schemes act handbook)

Turning back now to focus on alternative investments, when allocated appropriately, the case for alternative investments is that they can enhance diversification, offer inflation-linked or contractual cashflows, provide liquidity premiums and deliver differentiated sources of return. They may also support broader objectives, such as investment in UK productive finance or alignment with ESG/Net Zero goals.

However, alternative investments come with inherent complexities. They are generally less liquid, often valued periodically or using models, and tend to involve complex fee structures. They also rely heavily on delegated management and contractual arrangements, increasing demands on trustee oversight and documentation.

This article explores the growing role of alternative investments in pension scheme portfolios, the drivers behind their increased use, common types of alternative assets and key issues trustees should address to ensure any potential allocations comply with scheme rules, statutory obligations, fiduciary duties and good governance practice.

Traditional vs alternative assets

UK pension schemes have historically relied on bonds and listed equities as the foundation of their investment strategy:

• Bonds – including gilts, index-linked gilts and investment-grade corporate bonds – are commonly used to preserve capital, provide predictable income and serve as liability-matching assets or lower-risk anchors. Their contractual payments and relatively low volatility support cashflow planning and help trustees manage portfolio behaviour as schemes mature.

• Equities represent ownership in publicly traded companies and are primarily held to diversify portfolios and drive long-term growth. While more volatile than bonds, their daily liquidity and transparent market pricing help trustee monitor performance closely and manage funding risk.

Alternative investments – such as private equity, private credit, infrastructure, real estate, hedge funds, commodities, and insurance-linked securities (ILS) – differ from traditional assets mainly in liquidity, valuation, and structure. They are usually long-term, valued periodically or by models, and held in pooled funds or specialist vehicles rather than traded daily on public markets.

While these characteristics do not preclude their use by pension schemes, alternative investments typically require greater reliance on delegated management, more complex contractual arrangements and enhanced governance oversight (as alternatives tend to be less regulated). For trustees, the distinction between traditional and alternative assets is not simply one of return potential, but of how risks are identified, monitored and managed across the portfolio.

Why alternative assets – and why now?

Alternative investments are increasingly viewed as a core component of long-term strategy, a shift highlighted by Pensions Policy Institute research. For trustees they can offer:

• Potential for higher expected- risk-adjusted returns
• Enhanced diversification, reducing reliance on listed equities and bonds and spreading risk across different markets, sectors and strategies;
• Inflation-linked or contractual cashflows, supporting cashflow matching for maturing DB schemes and more predictable return characteristics within DC defaults;
• Access to liquidity premiums where capital is committed over long horizons; and
• Alignment with ESG or Net Zero objectives, including UK productive finance (e.g. infrastructure and sustainable projects).

Market conditions – including sustained low bond yields, equity volatility, inflationary pressures and interest rate shifts – have underscored the limitations of relying solely on traditional assets. Trustees are increasingly considering alternative investments to manage risk and support long-term funding objectives.

For DB schemes, end-game planning and increasing cashflow negativity have sharpened the focus on assets that support liability management and funding stability. For DC schemes, consolidation and the development of Long-Term Asset Funds (LTAFs) have made it more feasible to include illiquid alternatives in default arrangements where consistent with value‑for‑money and regulatory obligations.

Policy initiatives have reinforced the shift for DC schemes:

• Mansion House Compact (2023): 11 DC providers committed to allocate at least 5% of default funds to unlisted equities by 2030. By early 2025, allocations doubled from £0.8bn (0.36%) to £1.6bn (0.6%).
• Mansion House Accord (2025): 17 providers (covering about 90% of active DC savers) pledged to invest 10% of default funds in private markets by 2030, with at least 5% in UK assets.

Despite these ambitions, private markets remain only a very small component of DC portfolios overall, with progress most evident among a handful of larger master trusts. By contrast, DB schemes and funds – particularly those within the Local Government Pension Scheme (LGPS) – typically allocate a significantly higher proportion to alternatives.  Please refer back to our comments in our ‘Overview’ section in relation to the mandation provisions in the Pension Schemes Act 2026.

Open DB schemes tend to use alternatives to support growth, generate income, and complement liability-driven investment (LDI) programmes. Closed schemes face a split path:

• Buy-out preparation: Trustees planning an insurer buy-out may reduce or divest illiquid assets to meet underwriting criteria and improve transaction certainty.
• Run-off strategies: Trustees pursuing run-off may retain or even increase alternative allocations to generate income, smooth volatility, and support cashflow matching over time.

Common types of alternative assets

UK pension schemes commonly invest in the following alternative asset classes, each presenting distinct considerations for trustees in terms of risk, governance and compliance:

• Private equity: Long-term investments in unlisted companies, with returns linked to business growth and eventual exit. These investments are highly illiquid, often subject to multi-year lock-ups and complex performance-based fee structures. Trustees should understand the implications for liquidity and cost transparency.
• Private credit: Typically structured as lending to private companies or projects through senior secured, mezzanine, or asset-backed strategies. Returns are usually contractual interest payments, which may be fixed, floating, or inflation-linked. Trustees should monitor credit risk and borrower covenant compliance.
• Infrastructure: Investments in essential assets such as transport, utilities, renewable energy, and digital networks, increasingly aligned with ESG and Net Zero goals. Returns are typically generated under long-term contractual or regulated frameworks (e.g. user charges or concession agreements). Trustees should assess construction and operational risks and consider exposure to technological and regulatory change.
• Real estate: Investments in commercial or residential property, with returns typically derived from rental income and potential capital appreciation. Trustees should monitor market cycles, sector and location concentration, tenant risk, and ensure robust governance over property management.

Some schemes also invest in hedge funds, commodities or Insurance Linked Securities (ILS), often for diversification or risk management purposes. Hedge funds may use strategies such as buying and selling assets simultaneously to manage risk (long/short), investing across markets or countries (global macro), or exploiting pricing differences between assets (relative value). Commodities provide exposure to energy, metals or agricultural products, often via derivative contracts. ILS, such as catastrophe bonds, offer returns that are not tied to financial markets, but depend on the occurrence of specific events, such as natural disasters.

Across all alternative investments, trustees should evaluate alignment with scheme objectives, implications for liquidity and cashflow, fee structures and asset interaction, ensuring governance and oversight arrangements are proportionate to the complexity of the investment.

Trustees’ investment powers and fiduciary duties

The increasing use of alternative investments prompts interesting questions around trustees’ investment powers and fiduciary duties. These derive from three principal sources:

1. Scheme trust deed and rules: Trustees must confirm that any proposed investment falls within the powers granted and note any restrictions on asset classes, borrowing, derivatives, employer consent or guarantees. Most occupational pension schemes confer broad investment powers, often described as “absolute owner” powers, but trustees must still ensure compliance with the scheme’s governing provisions.
2. Statute and secondary legislation: The Pensions Act 1995 and the Occupational Pension Schemes (Investment) Regulations 2005 set key requirements, including:
   • Acting in the best interests of members and beneficiaries;
   • Diversifying to avoid excessive reliance on any asset, issuer, or risk;
   • Considering security, quality, liquidity and profitability of the portfolio as a whole; and
   • Obtaining and considering “proper advice” before making or varying investments (s.36 Pensions Act 1995) from appropriately authorised advisers.
3. Common law fiduciary duties: Courts require trustees to act with a high standard of care, including:
   • Acting as an ordinary prudent person investing on behalf of others (Learoyd v Whiteley);
   • Assessing risk at the portfolio level rather than individual assets (Nestlé v National Westminster Bank); and
   • Acting in members’ best financial interests, without subordinating them to trustees’ own ethical or political views (Cowan v Scargill).

As stated in the ‘Overview’, this is an area to watch as we are expecting Government guidance.  You can read more about this in our article which can you access here.

Practical considerations for alternative investments

When considering allocation to alternative assets, trustees should ensure their statutory obligations and fiduciary duties are met by:

• Defining strategy and allocation: Determine the role of alternative investments in the portfolio, set allocation, liquidity and concentration limits and ensure alignment with scheme rules and the Statement of Investment Principles (SIP).
• Delegating responsibly: Day-to-day management can be delegated, but trustees remain accountable for monitoring performance, compliance, and risk. Delegation arrangements should be documented and proportionate to the complexity of the investments.
• Managing valuation and risk: Adopt clear valuation methodologies and establish processes to challenge assumptions and monitor operational risk.
• Documenting decisions: Maintain an audit trail of advice received, rationale for investment decisions, and evidence of compliance with statutory obligations and fiduciary duties. Minutes and supporting documentation should clearly show how each investment aligns with legal and regulatory requirements.

These principles reflect The Pensions Regulator’s guidance on private market investments, which stresses acting in members’ best interests, maintaining prudent levels of non-regulated assets, monitoring liquidity and risk, and ensuring trustees have sufficient knowledge and oversight.

As The Pensions Regulator says, trustees will need to ensure that there is appropriate governance in place to enable the effective management and monitoring of private market investments, including:

• obtaining appropriate investment advice through the initial investment selection
• seeking legal advice on the structure and terms of the investment
• addressing operational issues such as meeting investment drawdown requirements, allocating costs, valuing assets and attributing and monitoring performance
• dealing with performance issues.

Trustees will also need to regularly monitor the performance of investments and scheme risks as part of the risk management framework.

Conclusion and looking ahead

Alternative investments are no longer peripheral – they are becoming an integral part of UK pension scheme strategy, driven by market conditions, scheme maturity and policy initiatives such as the Mansion House Compact and Accord (and now provisions in the Pension Scheme Act 2026). When allocated appropriately, alternative assets can deliver diversification, inflation protection and alignment with broader objectives like ESG and productive finance, but they also introduce complexity through illiquidity, valuation challenges and heightened governance demands.

For trustees, these developments do not alter the fundamentals: statutory obligations and fiduciary duties remain paramount. The legal framework – from scheme rules to legislation and common law – requires decisions to be grounded in members’ best financial interests, supported by proper advice and proportionate oversight.

Trustees should ensure that they keep up to date on developments in this area, including further guidance in due course from the Government in relation to fiduciary duties.

Burges Salmon is well placed to advise on all legal and compliance aspects of alternative investments. If you would like to discuss anything further, please contact Kate Granville Smith or your usual Burges Salmon contact.

This article has been co-authored by Yadhavi Analinkumar.