European defined contribution plans of all shapes and sizes are moving to include private market assets into their default funds, making use of liquidity-friendly pooled fund structures.
Liquidity requirements historically have limited defined contribution plans' efforts to invest in alternatives in many jurisdictions, including the U.S. and the U.K. Investments in private markets and infrastructure, which have formed part of defined benefit fund allocations for years, were considered unobtainable in the DC environment because of the need to provide daily valuation of assets and to have the capability for quick liquidation of assets due to the portable nature of DC accounts.
Those restraints not only kept DC plan executives from pursuing such investments, but they also provided a disincentive to money managers to expand their offerings.
"It is a bit of a chicken-and-egg situation. Plans were asking how this investment aligns with my objective and how does it contribute vs. what is available in the market and implementable," said Ralph Frank, head of DC at consulting firm Cardano in London.
But this is slowly changing. In Europe, DC plans now have access to a greater breadth of strategies, offering elements of private infrastructure, credit, real estate and equity investment options compared to previous years, sources say. In the more mature DC markets, including the U.K. and Italy, managers say plan sponsors want to diversify from concentrated public equity markets into alternatives.
But diversification is not the only reason asset owners are looking for this kind of exposure. An allocation between 10% and 15% to real assets, including real estate and private markets, can provide a degree of inflation protection and a return pickup at the same time, said Marc Haynes, head of institutional business, Europe Middle East Africa, at Cohen & Steers in London.
Since DC plan executives in the past few years settled operational challenges stemming from other regulatory priorities — like consolidation into multiemployer funds, compliance with U.K. master trust regulations and U.K. rules that did away with the requirement that retirees purchase an annuity — European plans are now showing signs of increased consideration for spicing up allocations, moving beyond the more familiar real estate.
In the U.K. 47% of the 19 largest master trusts already include a property allocation in their default options, according to April data from Defaqto, a financial information firm in Haddenham, England. By comparison, in the U.S. the average DC plan allocation to real estate vehicles was 0.4% as of March 31, according to Callan LLC.