TPT's 3.5% allocation to investment trusts and stocks of private equity companies is managed by AllianceBernstein Ltd. and is included in target-date funds to avoid high costs. Investment trusts list the shares of ownership in the fund company onto a registered stock exchange with daily pricing, which provides similar investment exposures to private equity but is more liquid because investors trade fund company units amongst themselves, rather than through a private equity manager, to meet investor cash flow needs.
"Maintaining liquidity and operational efficiency is key for us. We were looking for private equity which is efficient and would fit operationally with our model," TPT's Mr. Smith said.
Ensuring that private equity investments have daily liquidity has been a challenge for DC plans globally. For example, in June 2020, the U.S. Department of Labor permitted the use of certain private equity strategies in DC plans, allowing implementation of certain private equity strategies into target-date and target-risk or balanced funds, while complying with the Employee Retirement Income Security Act. But U.S. DC plans haven't been quick to adopt new strategies, either.
Because liquidity risk stops investors from making significant allocations to private markets and investors want an option to redeem investments at net asset value, the FCA's new U.K. long-term asset funds will have longer redemption periods, high levels of disclosure, and specific liquidity management and governance features to help investors manage the risk.
Still, Cushon's Mr. Pursaill said that liquidity is not generally problematic for U.K. DC plans that have predictable monthly cash flows.
Sonia Kataora, partner and head of DC investment at consultant Barnett Waddingham LLP in London, agreed with Mr. Pursaill. "Large DC schemes have more options as they can adopt a segregated approach and influence their own illiquid investments — exactly as NEST have recently started to do — but this is clearly much more resource-intensive to run," she said. "We do expect to see more of this approach over the coming years, though, particularly as more schemes and providers reach a large enough scale helped along by consolidation," she added.
Ms. Kataora noted that some managers improved their DC offerings, but the number of daily priced, daily traded funds is limited. "We have seen the introduction of funds providing illiquid asset exposure in a 'DC-friendly' way through pooled offering, which is both charge cap and platform compatible. This has relied on the use of a flat fee structure including an in-built premium in place of the performance fee," she said.
Mr. Pursaill added that DC master trusts need managers that can offer funds with established assets.
"If you are a DC scheme, you need to think about the J-curve," he said, because if plan participants leave master trusts before the investment has started to generate returns, they would have no benefit.
"That is a fairness issue. … One of the ways, is to buy into an established set of assets to spread the J-curve fairly," he said.