There is currently little consistent data for UK funds, but three-year annualised returns on master trusts hover around the 3 per cent to 6 per cent mark.
XPS Pensions, a pension consultancy that advises trustees, is so positive on the prospect of investing in illiquids that it wants a greater allocation than the 5 per cent suggested by Hunt last year.
Simeon Willis, chief investment officer at XPS Pensions Group, says: "The premise of the Mansion House compact [unveiled last year] was a 5 per cent allocation to a member's pot. But if you drill down to the analysis, the 5 per cent will have a very miniscule impact. Most of the impact will come from other changes like reducing fees through consolidating schemes, or people saving at an earlier stage.
"We think 5 per cent isn't enough to make a big difference; for any individual scheme, we think it's more like 20 per cent allocation, which will give you an 0.5 per cent expected return; when you compound that over a time horizon, that does give some significant improvement."
He adds that it could contribute a 14 per cent uplift to DC assets.
However, those whose business is risk are more cautious.
Jonathan Herbst, global head of financial services at law firm Norton Rose Fulbright, says: "If you're going to invest in smaller companies, you are increasing the risk [profile], which is why we've see concerns from the Financial Conduct Authority. They are worried about [everyone saying], 'This is all going to be OK', until it's not going to work."
This is articulated also by Harvey Knight, UK head of financial services at law firm Withers. "It's a classic widows and orphans; most people don't understand how to take risk and they take the view that it's regulated and the only way is up, while even the most conservative strategy assumes the markets go up and down.
"The FCA are naturally going to be super cautious, they think in terms of primary regulatory objectives. The last thing they want is Mrs Widow writing to them saying, 'This product has gone south, what are you going to do about it?'"
Nike Trost, head of asset management and pensions policy at the FCA, says: "We see the debate about investing in private assets and investing in the UK through the lens of how people ensure good returns are generated for consumers because in the DC space consumers are really dependent on the default investment proposition delivering good returns. It's well known most consumers are in auto-enrolment default schemes.
