Industry body publishes guides on illiquid exposures for DC plans

New guides to help defined contribution trustees in decisions around investment in less-liquid assets were welcomed by industry players for dispelling myths around such exposures and are expected to accelerate demand among U.K. retirement plans.

The Productive Finance Working Group — a group of representatives from trade bodies including the Pensions and Lifetime Savings Association, money managers, DC plans and investment consultants — was created by the Bank of England, Financial Conduct Authority and His Majesty's Treasury in 2020 to develop practical solutions to the barriers to investing in long-term, less-liquid assets.

The group on Nov. 24 published its Investing in Less Liquid Assets: Key Considerations guides, which aim to give DC trustees advice on key issues such as value for money, performance fees and liquidity management related to less-liquid assets. The guides also cover fund structures, due diligence and recommendations for consultants.

The guides relate to investments in assets such as venture capital, private equity, infrastructure, private debt and real estate.

U.K. corporate DC plan assets total more than £500 billion ($591.1 billion), up from about £200 billion in 2012 when automatic enrollment was introduced in the U.K., and is set to grow to £1 trillion by 2030.

"As U.K. DC schemes have developed and grown in size, the range of investment opportunities available to these schemes has increased significantly," the guides said. "And this is likely to increase still further in the years to come."

The guides said DC plans currently invest "relatively little in less liquid assets, compared to U.K. defined benefit pension schemes and DC schemes in other countries, such as Australia." That fact reflects several factors, including a focus on keeping costs low.

"However, some U.K. DC schemes are now starting to consider whether and how allocating to less liquid assets as part of a diversified portfolio within a default arrangement could improve member outcomes," such as improving potential risk-adjusted returns, reducing risk through diversification and exposure to net-zero-related assets.

Consultants and money managers welcomed the publications.

"We expect this to further accelerate the investment case and demand for illiquids by forward-thinking DC trustees," Mark Calnan, head of investments, Europe at Willis Towers Watson, said in an emailed comment. "Especially for defined contribution schemes and their often-younger members, a long-term approach to asset allocation demands a role for illiquids within a balanced portfolio. With historic illiquid allocations by most DC schemes near-zero, this is about opening up an attractive investment opportunity set that most schemes struggle to access. Exposure to an additional long-term asset class can suit DC scheme members with long-term investment horizons. Broadening investment options in this respect will allow greater diversification, support improved long-term returns and ultimately improve retirement outcomes."

That exposure is more important give that, over recent decades, "private markets have already gained a greater share of the best investment opportunities — as fewer growth companies list publicly or even issue their own debt at early stages," Mr. Calnan added.

Joanna Asfour, managing director, U.K. client solutions at private markets firm Partners Group, said in a separate emailed comment that the new guides "represent significant progress towards pulling down the barriers that prevent DC pension schemes from investing in private markets. The asset class should play a role in diversifying DC portfolios as it can improve ultimate net of all fees member outcomes through increased returns and reduced volatility."