If savers in DC pension schemes can’t access their money for 20 years or more, why should they be forced to invest ‘impatiently’ in daily dealt funds?
INTRODUCTION
Overwhelmingly, Defined Contribution (DC) pension schemes in the UK invest ‘impatiently’ in daily dealt public markets that offer daily liquidity.
But by doing so, they forgo a wide variety of illiquid alternative asset classes that could serve to markedly improve the risk and return profile of their members’ investments with the potential to boost DC savers retirement savings by tens of thousands of pounds.
Its time to change – its time for DC schemes to become ‘Patient DC’ schemes.
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REPORT HIGHLIGHTS
Below we summarise the key highlights from the report:
1. WHAT ARE ILLIQUID ALTERNATIVE ASSETS
Alternatives cover a very broad range of asset classes but with assets under management in the alternatives industry predicted to increase from $8.8tn in 2017 to $14tn in 2023, what are these assets, who is investing in them and why?
2. BENEFITS OF ILLIQUID ASSETS
While the characteristics of each alternative asset class can vary widely there are several potential benefits of an allocation to alternative assets in a traditional portfolio. These include reducing risk, enhance returns and provide inflation sensitivity.
3. ACCESS TO ILLIQUID ALTERNATIVES
The vast majority of investors will invest through a pooled fund managed by a specialised alternative investment manager. But with so many people dependent on their DC savings to provide for them in later life, making illiquid alternatives more accessible is key.
4. SELECTING YOUR ILLIQUID ALTERNATIVES MANAGERS
There is large dispersion of manager performance in alternatives, much more so than among managers for public securities. But, the good news is that once you’ve chosen a good manager, performance can be persistent.
5. ILLIQUIDITY AND RESPONSIBLE INVESTING
Environmental, Social and Governance (ESG) factors are becoming increasingly prominent in the pensions industry but with ESG already embedded in the investment process for most private market asset classes and their managers.
6. IMPACT OF ILLIQUID ALTERNATIVES ON DC SAVERS
Whilst the amount saved by an individual in a DC pension will depend on many factors, generally speaking the earlier in the savings stage illiquids are added and the higher the contributions that members pay in, the better the results will be from these investments.
7. OUR VIEW ON PATIENT CAPITAL
HM Treasury define patient capital as capital provided to support the UK’s innovative start up companies with high growth potential – or, in other words, domestic venture capital. While this has a role to play in a DC default, we recommend approaching default design with a longer-term view – what we call Patient DC.
8. WHAT'S CURRENTLY AVAILABLE IN THE ILLIQUID ALTERNATIVES FIELD
Due to the current barriers (both actual and perceived) for DC schemes to invest in more illiquid funds members are missing out on investment opportunities. However, there are funds available which offer exposure to illiquid asset classes in a liquid fund structure.
While incremental changes are a big driver of overall progress, a real sweeping change is required if we are to create happy retirements for Generation DC.
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