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.”