Illiquid assets could be ‘new frontier’ for DC scheme investment, pensions thinktank says

Illiquid and alternative assets could become much more widely used by defined contribution schemes, a pensions thinktank says, as the market looks to platforms and government guidance to overcome barriers to investments.

A paper by the Pensions Policy Institute argues that defined benefit schemes have noted both potential diversification and performance gains from investing in illiquid and alternative assets over and above publicly traded stocks and bonds.

However, the thinktank notes that DC platforms have not made illiquid funds so readily available, and will need to innovate to overcome the hurdle that the assets are generally priced differently than the rest of those offered to DC schemes.

With a 0.75 per cent charge cap applying on default strategies under automatic enrolment, the PPI notes that this pricing on illiquid assets has made it tough for DC schemes to properly assess their compliance with the cap.

PPI head of policy research Daniela Silcock says: “Alongside the operational and regulatory challenges, there is also an information gap facing DC scheme providers, who may be unsure of the benefits of investing in these types of assets.

“In order to encourage further exploration there may need to be impartial information and guidance from a trusted source, such as the government or an industry body, explaining the potential benefits to DC schemes of investing in illiquid and alternative assets, backed up with robust data, and showing the estimated likely returns net of charges.  Any communication approach should also include the main intermediaries dealing with DC scheme providers: advisers, consultants and platform managers.”

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There are 2 comments at the moment, we would love to hear your opinion too.

  1. DC schemes are perfectly able to access illiquid and alternative assets via closed ended funds (investment trusts)which are often very cost effective and also are priced by the market and offer liquidity. After a recent FCA consultation paper on allowing illiquid assets in open-ended funds it seems as if there is a concerted effort to allow illiquid assets to be bought at inflated valuations (earning fund managers and promoters higher fees). Of course when clients want to realise the value of their investments, they will be considerably lower, funds will close etc. and the poor old IFA sector will be levied to bail out those clients who have suffered losses.

    There is no need for any rule changes or further promotion of illiquid or alternative assets – they are widely available and tradeable at prices set by the market. This is an ideal position for clients and allows them access and appropriate outcomes.

  2. …just scooted through the report – sponsored by Blackrock (who also supplied the fairly heroic growth assumptions). Investment Trusts only mentioned once, ironically as an example of correlation between liquid and illiquid assets becoming much closer during market downturns, which rather dents the argument for holding illiquid assets anyway – when equities/bonds go up, illiquid assets are uncorrelated (and don’t go up) but when equities and bonds go down, illiquid assets go down too. You couldn’t make this stuff up (unless were paid to by an interested party).

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