Patient DC

14 February 2019

Patient DCIf 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:

Patient DC1. 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?

Patient DC2. 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.

Patient DC3. 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. 

Patient DC4. 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.

Patient DC5. 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.

Patient DC6. 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.

Patient DC7. 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. 

Patient DC8. 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.

To find out more please contact us:

Maria Nazarova-Doyle, MSc, CFA
Head of DC Investment Consulting
Tel: +44 (0)207 309 8108
Email: maria_nazarova-doyle@jltgroup.com
Penelope Cochrane CFA, CAIA
Senior Alternatives Researcher
Tel: +44 (0)207 558 3272
Email: penelope_cochrane@jltgroup.com