U.K. defined contribution plans could enjoy the benefits of investing in infrastructure to the same extent as their defined benefit counterparts, but scarce investment options combined with misconceptions about accessing the asset class are holding newer plans back, industry sources said.
In an attempt to capture an illiquidity premium and inflation protection — at the same time as gaining returns that have a low correlation with the equity investments typically dominating newer portfolios — appetite by U.K. DC plans for infrastructure is rising, sources said.
The £1.8 billion ($2.3 billion) National Employment Savings Trust, London, is looking to gain infrastructure exposure and is actively meeting with managers to develop a solution specifically for NEST, said Mark Fawcett, chief investment officer at the plan, which launched in 2011.
"We are enthusiastically looking for the right solution. The combination of natural inflation-hedge and illiquidity premium that infrastructure offers … is attractive for us as a long-term investor. We are interested in both equity infrastructure as well as debt infrastructure. And we are speaking to managers (about) how we can create a solution for our default fund at a low fee," said Mr. Fawcett.
He said executives plan on allocating to NEST's real assets portfolio, which has a maximum allocation of 20% of the trust's assets and currently consists of real estate. Infrastructure could make up 15% to 20% of the real assets portfolio, he added.
"Infrastructure equity could also be included in that real asset allocation bucket. We could do a bit more with infrastructure debt as part of credit investments," he added. He declined to disclose the names of managers NEST executives are in discussions with.
Despite efforts by consultants and plans, the industry is yet to explore the scope and format best suited for DC funds, sources said. DC plan sponsors have opted to stay away from the operational complexity that comes with illiquids, not only in the U.K. but also in other markets such as the U.S., where daily valuation, liquidity and fees are often cited as obstacles to adding illiquids.