Consultants, advisers and trustees generally agree that investment in illiquids have the potential to deliver better outcomes net of costs, but say clients are sceptical whether higher costs will deliver higher returns.
That is just one of the findings of a major piece of research into adviser and trustee attitudes to bringing private market assets into DC pension investment strategies published today by Corporate Adviser. GET YOUR COPY HERE
The Private Markets in DC: Adviser and Trustee Perspectives report finds that master trust to master trust transfers are perceived by consultants as likely to be more complex as re-registration
of large private market allocations may be difficult to achieve. Trustees and consultants are also concerned at the opacity of private markets performance data and a lack of industry skill in interpreting it. They want greater standardisation of how performance data is presented to aid comparison and interpretation.
They also want to see more research around how illiquid investments will perform in market shocks, how gating will be managed, and how intergenerational unfairness can be avoided.
Consultants are supportive of the Long-term Asset Fund (LTAF) structure, and are confident it addresses potential barriers to bringing private assets into DC. They expect early phase investments to focus on private equity, venture capital, infrastructure and real estate assets, with higher allocations of private credit during the at-retirement and through retirement phase. Most consultants and trustees think an allocation of 15 to 20 per cent of assets is appropriate.
Private market asset investments are perceived as easier to implement in trust-based arrangements than contract-based ones, although both should be achievable.
Private asset investments in social housing and the green transition are seen as offering strong opportunities to engage with members. But providers need to beware chasing strong domestic stories at the cost of investment returns. However, providers that effectively demonstrate the social and environmental value they deliver should expect to receive greater asset inflows
Consultants, advisers and trustees are generally supportive of the UK government’s drive to steer DC assets towards UK productive finance, but caution that investment outcomes should remain the paramount priority. Rather than forcing investment in the UK, the government should create incentives for schemes to do so – through tax incentives or lighter touch disclosure regulations, say advisers and trustees.
Corporate Adviser editor and Corporate Adviser Intelligence head of research John Greenwood says: “For years the investment components used by the defined contribution (DC) pensions industry have been almost entirely reliant on passive funds. Spurred by the government’s Mansion House Compact initiative and a growing appreciation of the potential risk/return benefits, providers are now racing to embrace illiquid investments within their portfolios.
“This trend marks arguably the biggest change to investment strategy in the history of DC pensions. The industry’s widespread use of trackers is indicative of the culture of extreme focus on charges that persists within the sector.
“The potential future for private markets within DC pensions is exciting. A great amount of work is being done by providers, asset managers and regulators to make it happen. But for this bold initiative to succeed it needs to take all stakeholders on the journey, and that means the employers that sponsor schemes and those who advise them, and members and the trustees who represent them.
“The industry is asking employers and scheme members to pay more for something they have been told has functioned relatively well for decades. So understanding the worries, concerns and areas of doubt of consultants, advisers and trustees is an important element of success of this project.
“Those currently active in the introduction of private assets into DC pension portfolios can be cheered at the findings of the research set out in this report. Consultants, advisers and trustees are generally supportive of the project and buy into the concept that the extra costs, complexity and implementation challenges will be more than offset by the increased returns.
“But the report also finds areas where work is still needed, further communication still required and research needed if end users of DC schemes are to be comfortable taking the leap of faith that is being asked of them. For employers and their members with some providers there will be no alternative but to embrace newly-created investment offerings – other than by switching provider. But for others, where low-cost alternatives that follow the old world model are available, buy-in will be needed.
“Much of the momentum towards private assets in the market today can be credited to the government’s Mansion House ambition of driving increased investment in the UK. It remains to be seen to what extent this objective is achieved. But in the long term, UK DC investors could be the real winners with higher pots.”