XPS Pensions Group has launched a new investment option for smaller DC schemes that targets a 20 per cent allocation to illiquid assets.
This comes as a response to the Chancellor’s Mansion House Compact, a voluntary industry agreement announced last summer, which saw DC pension providers pledging to allocate at least 5 per cent of their default funds to unlisted equities by 2030.
The XPS solution will be available to schemes with assets of at least £30m. It is the first solution to offer wide-scale access to illiquids of this magnitude for small and medium sized DC schemes.
The scheme invests via a platform provider who manages a blended fund, periodically rebalanced to maintain the target allocation. Each blended arrangement is a scheme specific structure so there are no other investors to deplete the liquid component.
XPS says this approach has been designed to be a cost-effective option, while also offering the flexibility to be tailored to individual scheme requirements.
The arrangements would include additional fees of the order of 0.4 per cent per annum, compared to investing in a traditional liquid strategy. XPS says it believe these additional charges will be offset by higher returns and greater diversification from listed markets than otherwise possible.
XPS project that the additional net return would be expected to increase a typical member’s pot by 7 per cent. In adds the private market focus also provides scope for additional ESG impact through targeted private market investment in key sectors.
XPS head DC investment Mark Searle says: “There is a huge opportunity for DC schemes to benefit from growth in private markets, but until now, this has only been accessible for the largest schemes.
“This approach is the first-of-its-kind to provide access of this magnitude to illiquid private market assets for mainstream small and medium sized DC schemes. We set out with the ambition of creating an approach that allows as many DC members as possible to benefit from the merits of private market assets, without having to wait for a change in regulation from the Government.“
XPS chief investment officer Simeon Willis, adds: “Each scheme will have its own arrangement, combining liquid and illiquid assets. This gives them autonomy over choosing funds and how the allocation changes through time, and crucially maintains independence from other investors.
“This approach will give schemes substantive exposure to illiquid assets, without the potential for other investors to eat up their liquidity buffer for breakfast. This liquidity snaffling has caused high profile difficulties for pooled arrangements which have attempted to overcome the need for liquidity by pooling liquid and illiquid assets together in a daily traded fund.”