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Defined Contribution

Investment Association: Adding illiquid investments to DC portfolios could raise retirement income

Adding illiquid investments to portfolios can help defined contribution plans allocate assets more efficiently, the Investment Association said in a position paper Tuesday.

In the paper "Putting Investment at the Heart of DC Pension," the U.K. industry body for the money management sector said investment management is critically important to boosting DC retirement income for participants along with increasing contributions.

DC plans should be able to build fully diversified portfolios, IA said, adding that changes in regulations and market practices in the U.K. could be better facilitate that.

Currently, a greater focus is placed on administration and communication by employers and DC trustees than investment offerings, IA said. "This can lead to an asset allocation that is heavily (skewed) toward more familiar, easy accessible and liquid asset classes."

In addition, under current rules, illiquid investments require daily market valuations. But the association said, "a lack of daily valuation should not be a fundamental obstacle to investing in less liquid assets in a daily traded fund," because DC participants in the default option cannot access their money until they are 55, IA said.

"The illiquid part of a portfolio can be priced using its last valuation point. It can be updated every time there is a new valuation point. For the purposes of generating a daily price on the fund it should be sufficient to use the latest valuation of the illiquid component," IA said.

"Operationally, we recognize that there are significant challenges faced by platforms in moving away from a daily traded environment, particularly where they are seeking to respond to a range of different investor behaviors in the context of multiple DC plans and individual accounts within those (plans). Managing cash flows in this context can be a particular issue where administration operates on a daily cycle."

"Our view is that there is no silver bullet. Rather, a series of demand- and supply-side measures that incrementally could help to make it more straightforward for DC (plans) to invest more broadly. These measures include consideration of whether the current U.K. fund regime best facilitates access to asset classes such as infrastructure," the association said.

But "there is a scope to explore whether a new fund vehicle (structure) could be better facilitate the access to less liquid asset classes."

An IA spokesman could not be reached.