Private market allocations in UK defined contribution (DC) default funds could rise to as much as 30 per cent by 2035, with private credit set to play an increasingly important role, Standard Life has predicted.

New research from Standard Life and WPI Economics found that private market allocations in DC defaults could increase from around 2 per cent to 4 per cent today to between 15 per cent and 30 per cent during the growth phase of retirement saving over the next decade.

The report, From Scale to Impact: A Blueprint for the Future DC Pensions Market, said future default funds could invest across a broader mix of private assets rather than concentrating exposure in a single asset class.

Under its projected scenario, said private credit could make up 20 per cent to 40 per cent of private market allocations. Infrastructure and real assets could also account for between 20 per cent and 40 per cent.

The report said private credit could play a growing role in helping schemes manage liquidity and downside risk, while infrastructure could provide long-term, inflation-linked cashflows and diversification.

Read more: Private credit stress rises sharply among smallest borrowers

Private equity and venture capital, meanwhile, are expected to remain important sources of long-term growth.

The research also projected further consolidation of the UK workplace DC market, with between 10 and 15 larger pension schemes potentially dominating the sector by 2035, each managing more than £50bn in assets.

Standard Life and WPI Economics said greater scale could allow schemes to build specialist investment expertise and gain access to private market opportunities already commonly used by large pension funds in countries such as Australia and Canada.

Australian superannuation funds currently allocate around 17 per cent of assets to private markets, according to the report.

It also suggested UK schemes could retain a significant domestic bias within their private market portfolios. Between 30 per cent and 50 per cent of private market investments could be allocated to UK opportunities, compared with around 5 per cent to 10 per cent of listed equity investments.

On this basis, Standard Life estimated that between £40bn and £200bn of DC pension assets could be invested in UK private markets by 2035, compared with an estimated £2bn to £3bn invested in private markets by master trusts today.

“Scale changes what pension schemes can invest in and how they invest. Larger schemes are better positioned to access a wider range of opportunities, build specialist expertise and construct more diversified portfolios across different private market asset classes,” said Joe Ahern, director of policy at WPI Economics.

Read more: Why UK pension fund Nest is still bullish on private credit