In March, the government opened a consultation into facilitating DC investment into illiquids. DC investment in illiquids is minimal in the UK, compared with countries such as Australia.
In October, the Department for Work and Pensions confirmed it would push ahead with a requirement for trustees to include a policy on illiquid investments in their DC schemes’ chair’s statement, despite industry criticism. DC schemes of all sizes will be subject to the new regulations.
The Productive Finance Working Group, convened by the Bank of England, HM Treasury and the Financial Conduct Authority, published a series of guides on November 24 aimed at helping trustees to better understand investing in illiquid assets.
“A greater weight could be put on the quality as well as the cost of the investment strategy as part of the decision-making process,” it said.
The group warned that charges were too regularly used as a “proxy for value”, with investment decisions based on “a handful of basis points”.
It acknowledged that investing in less liquid assets tends to be more costly and may take time to generate value, with some investments failing to deliver any value at all.
The group did, however, suggest that the usual time horizons applied for assessing investment returns in DC – which see returns measured over quarters, one, three and five years – would be unsuitable for illiquids.
“For employers selecting a pension provider for their employees, shifting the focus to value means selecting approaches that are expected to deliver good retirement outcomes, which also will not necessarily correspond to the cheapest option,” the group said.
“Be prepared to increase charges for members if an allocation to less liquid assets increases the chance of improving retirement outcomes for their members, recognizing long-term allocations to less liquids will take time to build,” it advised.
The guides also provide overviews of the fund structures that can offer DC schemes access to illiquids, liquidity management and performance fees for illiquid funds.
“We expect this to further accelerate the investment case and demand for illiquids by forward-thinking DC trustees,” said Mark Calnan, head of investments for Europe at Willis Towers Watson.
“Especially for defined contribution schemes and their often-younger members, a long-term approach to asset allocation demands a role for illiquids within a balanced portfolio.”
Franklin Templeton head of UK retirement Lee Hollingworth said that many DC schemes will currently be evaluating illiquids.
“Private markets have much to offer investors to address the challenging economic conditions such as high inflation and the low-growth environment,” he said.
“They can also support a scheme’s sustainable investment goals through direct investment in areas like energy transition, social infrastructure (eg, building healthcare, education and affordable housing) and natural capital.”