New research aims to identify the barriers that prevent DC schemes accessing private markets and other illiquid investments.
The research was carried out by the Pensions Policy Institute among a range of DC gatekeepers including schemes, consultants and providers.
The research found there were diverse views regarding the ease and accessibility of illiquids for DC schemes. The research concluded most schemes can invest into semi-illiquid funds through a platform, but these are often costly, and not all platforms host these assets. This can be a very real barrier for many smaller schemes who can not necessarily afford these additional costs.
Most of those surveyed for this research agreed that daily dealing was no necessary and is not a real barrier to wider take-up of these investments. Those contributing said an emphasis on daily dealing of illiquids could actually hinder innovation in this space.
There was also widespread agreement that performance fees were not necessary and should be discouraged.
The research also highlighted the problem of competition on costs in the market, which can discourage schemes from pursuing more diverse investment strategies that might include illiquid investments. There is concern that this could potentially impact overall member outcomes.
Governance resources is also a key challenge for schemes looking to invest in illiquids.
The PPI concluded that for greater take-up of illiquids in the DC space, change and innovation needs to come from the top, with a lead being set by the government. Investment in illiquid is far more common in the DB sector, as well as in other jurisdictions, for example in the DC pensions market in Australia.
This research says for illiquid investment to become a feature of the UK DC sector, the government needs to improve consistency in transparency and terminology and should push for private market providers to structure charges that fit DC schemes, not the other way round.
It pointed out that the big barrier remains the problem of increasing fees and innovation on this needs to come from government and regulators. The research says this does not necessarily mean “ripping up the charge cap” but starting to get the view across that it is okay to increase fees for members a little bit.
It also said that for larger schemes platform providers will be important and these need to work on getting round structural issues and finding a solution to the issue of daily pricing, for example coming up with monthly pricing which could be quoted on a daily basis, or coming up with other pragmatic solutions.
The research was sponsored by the Defined Contribution Investment Forum.
