Holy Auto Enrollment, It’s DC to the Rescue!

The entry of DC (defined contribution) pension money into U.K. real estate is not quite as omnipotent as the dark knight but is distinctly positive for the market. With assistance from aging boy wonder sidekick public DB (defined benefit) capital, the two are more than a match for the private DB sell-down villain.

The Office of National Statistics (ONS) publishes quarterly data on the holdings of funded occupational pension schemes in the U.K., splitting them out into public DB, private DB and public DC. From this data, we can glean the rough value of the property holdings in each bucket and how that has changed.

Figure 1 shows the data from the peak of real estate valuations in Q2 2022 to the most recent ONS data point for the end of Q3 2024 (recently released). Over this timeframe, the value of public DB property holdings decreased by £5.6B to £35.6B, and private DB decreased by £23.7B to £42.6B. Meanwhile, public DC holdings have increased by £5.2B to £9.5B.

During the same period, MSCI all property values declined by -22.4%. Assuming that DB and DC property portfolios performed in line with this market average, a significant amount of the above value change would be attributable to market movement.

For private DB, the story is roughly of three parts value fall and two parts disinvestment. Of the £23.7B fall in the value of private DB property holdings, -£14.9B of this would be attributable to market movement, implying a further -£8.8B of net sales of property.

Public DB has apparently been a net buyer over the period since the -£5.6B decline in the value of the property holdings is greater than the -£9.2B decline that would arise from market movement. The balance of +£3.7B is the implied value of net purchases.

Private DC has been a net buyer to the tune of +£6.2B, after accounting for market movement of -£0.9B in the value of its initial property holding.

Figure 1: Reconciling the change in value of DB and DC property holdings

Private DC and public DB net investment totals +£1.0B greater than private DB net disinvestment.

There is a caveat to these figures which centers around the assumption that existing property holdings behaved (or were marked to market) in the same way and to the same extent as the MSCI universe. This may not have been the case. If there is a lag in valuations, as may reasonably occur with accounting practice around less liquid stakes in indirect holdings for example, that could effectively serve to inflate the net investment number—potentially understating net sales (or over-stating net purchases). The extent to which this is the case, however, is unknown.

The data suggests that the concern of a couple of years ago, that rapid withdrawal of DB money from the U.K. real estate market would cause a severe imbalance in the volume of sellers versus buyers with the potential for a slump in real estate values, was overblown. The slump has not materialized and market balance has been maintained. The DC superhero has helped keep order in U.K. property.