U.K. defined contribution plan participants could see an average 10% higher retirement outcomes if illiquid asset classes were permitted in the default strategy of their plan, according to a study by consultant JLT Employee Benefits.
As DC assets grow in size and participant withdrawals amount to a smaller proportion of those assets, plan executives will see a decrease in the need to maintain high liquidity in U.K. DC plans, creating an opportunity to allocate a bigger proportion of assets to illiquids such as private equity and infrastructure equity, JLT said.
According to the study, an allocation that consists of 80% public equity, 10% private equity and 10% infrastructure equity could yield on average 10% more in retirement than if the default strategy invested in public equity only, JLT found.
But illiquid investments such as private equity, infrastructure and real estate carry risks for DC plan executives, including valuation in certain market conditions or alternative manager selection. However, with proper diversification and some smoothing of valuations, the measured volatility can appear relatively low compared to public investments, JLT said.
"The focus on daily-dealt funds with near 100% liquidity is a fundamentally impatient approach to DC. Many default strategies are currently failing to adequately diversify investments, precluding savers from the valuable illiquidity premium that can be accessed through alternatives," said Maria Nazarova-Doyle, head of DC investment consulting at JLT, said in a news release.
A spokeswoman could not be reached to provide additional details.