Publication

Illiquid Investments for DC schemes

Embracing the opportunities

06 Dec 2021

Welcome to the first publication in our Embracing the opportunities series, where we focus on illiquid investments for DC schemes. 

To begin our series, we’ll first establish why DC schemes can, and should, access illiquid investments to improve outcomes for their members. We’ll address some of the common myths, and cut through the noise, by identifying some specific opportunities and the potential impact they could have for members.

The Productive Finance Working Group published its report A Roadmap for Increasing Productive Finance Investment in September 2021, and made several recommendations. Fundamentally, the Group identified scope to significantly enhance outcomes for DC savers, but that the pensions industry needs to take action to make this happen.

Hymans Robertson welcomes the report from the Productive Finance Working Group, which in our view helps to restore the positive view on illiquid investing after the widely rebuffed attempt by The Pensions Regulator to limit exposure to 20% of pension assets. Illiquid investing is not uncommon for DC pension schemes globally.

The Australian DC market, which is more mature than the UK, invests somewhere in the region of 20% of assets, on average, in illiquid investments. The Universities’ Superannuation Scheme, which includes a DC section, invests between 25-30% in illiquid investment assets. The National  Employment Savings Trust (NEST) has committed to invest around 15% of default assets in illiquid investments, and Smart Pension already invest 10% in illiquid investments. Despite this, there is relatively little adoption across the DC industry more generally.

We think illiquid investing is too often placed in the ‘too hard’ or ‘too expensive’ categories, but we could be limiting the ability to improve outcomes for DC savers with this mindset.

What is illiquid investing?

Discussions around illiquid investing for DC schemes have too often focused in general terms, i.e. referring to private markets (or ‘illiquids’) as one asset class as opposed to multiple asset classes. We will cut to the chase and focus on the following specific illiquid investment opportunities:

  • Infrastructure
  • Private Equity
  • Private Debt
  • Real Estate

As well as presenting potentially attractive investment opportunities, each of these also provide the opportunity for pension schemes to integrate their climate and wider sustainability goals in line with the broader portfolio. This creates the added benefit of providing opportunities to share clear stories with members about the good their money is doing, which we believe can lead to improved engagement.

We’ll focus on each illiquid investments asset class individually for the remaining publications in this series. We will consider the investment opportunity in more depth, how to overcome practical challenges to access them, and consider potential roles in a glidepath for members.

So, with the opportunity to deliver higher returns, improve diversification and ultimately improve outcomes for members, why aren’t DC schemes investing more heavily in illiquid investments?

Look out for further publications in our illiquid investments for DC schemes series. If you have any questions on the subject in the meantime, please get in touch.

Embracing the opportunities - Illiquid Investments for DC schemes

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