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Defined Contribution

Adding illiquid investments to DC plans creates challenges for sponsors — PLSA

U.K. defined contribution plans should view investments through the lens of accessing the parts of the economy that provide the right value for participants, including illiquid assets, delegates heard Thursday at the Pensions and Lifetime Saving Association's annual investment conference in Edinburgh.

"Illiquidity is irrelevant" because of the daily cashflows that U.K. multiemployer DC plans will be getting as a result of total employer and employee contributions increases in the U.K. to 8% from 5% as of April 6, said Nico Aspinall, chief investment officer at the 5 billion ($6.6 billion) People's Pension, the DC multiemployer plan sponsored by B&CE.

Speaking on a panel, Mr. Aspinall said that DC plan concerns over illiquid asset investing are different than in defined benefit funds. "Cash drag every day is not the same as being a forced seller of assets," he said.

But speakers on the panel debated how DC plans can gain access to investments in the real economy at a price that will give value to plan participants. Getting illiquid assets including infrastructure, direct property and venture capital into DC portfolio is challenging because of performance fees, speakers agreed.

"Discussions are happening around how to get these assets classes into DC portfolios," said Emma Douglas, head of DC solutions at Legal & General Investment Management and chairwoman of PLSA's policy board. "(But) creating a class of fund that doesn't have performance fees would mean annual management charges goes up," she said.

Fees, however, need to come down, said Mark Jaffray, head of DC consulting at Hymans Robertson. "To ask participants to add a 5% allocation illiquids into the portfolio by increasing participant borne charges by a third, as an example, is difficult to communicate," Mr. Jaffray said.

There is a problem with the structure of performance fees, Mr. Aspinall said, adding that he wants the smallest possible non-management fee for illiquid investments.