Goverment plans to boost DC investment into illiquids could add to scheme costs without delivering benefits to members, according to a leading pension consultant.
In its response to the government consultation on this issue, which closes later this week, LCP said the current proposals, while well-intentioned, could fail to achieve their objective of improving member returns.
Under these Department of Work and Pension proposals trustees of larger DC schemes would have to state their policy on investment in illiquid assets and disclose holdings on a quarterly basis, via the schemes statement of investment principles (SIP) and the annual chair’s statement. However the Department of Work and Pensions points out it is asking only for annual declaration, albeit reflecting quarterly valuations.
LCP raises a number of objections. It points out that these documents are rarely read by members so this is unlikely to increase member engagement, as the consultation suggests.
More importantly, LCP says there would be a cost to gathering this data, particularly on a quarterly basis which would add to scheme costs, potentially to the detriment of members. LCP says quarterly reporting adds little value when DC pension schemes invest for the long term and therefore typically review strategic allocations of investment strategy on an annual or triennial basis.
LCP adds that these proposals don’t tackle the real barriers which do exist to DC schemes investing more in illiquid assets. These include concerns about the fairness of assets priced monthly or quarterly that can be sold by members daily — and the tension between the regulatory need to provide ready access to DC funds, while many illiquid investments require money to be tied up for longer periods.
LCP say that regulatory clarity from DWP on this point would help schemes gain comfort to invest.
LCP partner and head of DC Laura Myers says: “The DWP’s aim to remove barriers to investment in illiquid assets is well-intentioned, but these latest proposals risk adding a regulatory burden whilst delivering little for members.
“Member engagement is unlikely to be enhanced by adding complex financial information into little-read documents, especially as these requirements only relate to the ‘default fund’ investments which apply to the least engaged scheme members.
“Requiring quarterly reporting of holdings of illiquid assets seems unnecessarily costly and burdensome, especially as many schemes may only make strategic decisions about their asset allocation on an annual or triennial basis.
“Most DC trustees would be willing to consider greater investment in illiquid assets but face barriers which will not be addressed by these latest proposals. Trustees need greater guidance from government on how best to reconcile greater use of investments which involve less frequent pricing and the ability consequently for members to ‘win’ and ‘lose’. We also have the issue of tying up funds for long periods with the demands of members who expect access to their funds at short notice.”
A spokesperson for the DWP said: “Opening up greater illiquid asset options to defined contribution pension schemes will help enable them to build better diversified portfolios more easily, while also having the potential to improve saver outcomes.
“Our new proposals aim to increase transparency, comparison and competition within the defined contribution market, which has become dominated by a focus on low cost above all other measures of value.
“We plan to engage further with industry and other stakeholders to explore how the feedback received at consultation can feed into the design of future policy.”
