Mark Jaffray, Head of DC Consulting at Hymans Robertson responds to the Chancellor’s proposal to make it easier for DC schemes to invest in patient capital

“The Chancellor has quite rightly shone a spotlight today on improving access to finance for the UK’s innovative firms and infrastructure projects, including encouraging DC schemes to include them in their investment strategy. A move in this direction is welcome as it’s important that the barriers faced by DC schemes looking to invest in more illiquid assets, such as these, are reduced. Today’s low yield and low contribution environment means that schemes’ DC investment strategies need to work harder to generate the returns required.

“We welcome the Chancellor’s commitment to consult on the relevance of a charge cap as he encourages greater investment in patient capital. While the charge cap has largely been a positive force, particularly in driving better value for members, it can prohibit investment in illiquid assets which are expensive to transact and manage. Even for larger schemes which have the necessary scale to drive down fees, an allocation to illiquid assets would generally only be between 10% and 20% of the portfolio. A review of the charge cap makes sense if the Chancellor is looking to increase this allocation.

“Investments such as infrastructure and private equity not only offer the potential for additional returns (which is vital in the early stages of DC investment) but also help to diversify portfolios, a key component of managing risk.

“However the Chancellor’s suggestion to use DC savings to invest in growing businesses should be approached carefully if it involves start-up investment. Although we are advocates of taking higher investment risk during the growth phase of the savings journey, it’s well known that over 80% of start-ups don’t succeed. Unlike in DB, DC members carry all the risk and the last thing we need is for a high profile failure to damage industry confidence and trust.”