The industry body publishes guidance on illiquid commitments for DC plans

New guides designed to help defined contribution trustees make decisions about investing in less liquid assets have been welcomed by industry stakeholders to dispel myths about such risks and are expected to accelerate demand for UK pension plans.

The Productive Finance Working Group – a group of representatives from trade associations including the Pensions and Lifetime Savings Association, money managers, DC plans and investment advisers – was formed in 2020 by the Bank of England, the Financial Conduct Authority and His Majesty’s Treasury to promote the Practice developing solutions to the barriers to investing in long-term, less liquid assets.

The group on Thursday released its guides to Investing in Less Liquid Assets: Key Considerations, which aim to provide DC fiduciaries with advice on key issues such as value for money, performance fees and liquidity management related to less liquid assets. The guides also cover fund structures, due diligence and recommendations for advisers.

The guides relate to investing in assets such as venture capital, private equity, infrastructure, private debt and real estate.

DC business plan assets in the UK are worth more than £500bn ($591.1bn), up from around £200bn in 2012 when automatic enrollment was introduced in the UK, and is expected to increase by 2030 grow to £1 trillion.

“As UK DC programs have evolved and grown in size, the range of investment opportunities available to these programs has increased significantly,” the guides state. “And that is likely to increase further in the years to come.”

According to the guides, DC plans currently invest “relatively little in less liquid assets compared to UK defined benefit plans and DC plans in other countries such as Australia”. This fact reflects several factors, including a focus on low cost.

“However, some UK DC schemes are now beginning to explore whether and how allocation to less liquid assets as part of a diversified portfolio within a default arrangement could improve members’ outcomes,” such as improving potential risk-adjusted returns, reducing risk through Diversification and exposure to net zero related assets.

Advisors and asset managers welcomed the releases.

“We expect this to continue to accelerate the investment case and demand for illiquid future-oriented DC trustees,” said Mark Calnan, Willis Towers Watson’s head of investments, Europe, in an emailed comment. “Particularly for defined contribution schemes and their often younger members, a long-term approach to asset allocation requires a role for illiquids within a balanced portfolio. Since most DC systems have historically had illiquid allocations close to zero, the challenge is to provide attractive investment opportunities that most systems have difficulty accessing. Exposure to an additional long-term asset class may be appropriate for members of DC schemes with a long-term investment horizon. Expanding investment opportunities in this regard will allow for greater diversification, support improved long-term returns and ultimately improve retirement outcomes.”

This commitment is all the more important given that over the past few decades, “private markets have already captured a larger share of the best investment opportunities – with fewer growth companies going public or even issuing their own early-stage debt,” added Mr. Calnan.

Joanna Asfour, Managing Director, UK Client Solutions at private markets firm Partners Group, said in a separate emailed comment that the new guides “represent significant progress in breaking down the barriers preventing DC pension schemes from investing in private markets . The asset class should play a role in diversifying DC portfolios as it can improve members’ bottom line results through higher returns and lower volatility.”


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