Mark Jaffray, partner and head of DC consulting at Hymans Robertson reacts to the DWP's consultation into expanding DC investment opportunities:

"The consultation’s spotlight on small schemes and its suggestion that they should conduct a triennial review indicates support from the DWP for consolidation within DC. It could be a catalyst for schemes to merge, or close if they can’t deliver as good returns at lower fees than a bigger scheme could deliver. Bigger schemes should be able to achieve economies of scale and invest to capture more opportunities to improve outcomes to members.

"We welcome the government’s commitment to explore how we can remove barriers to investing in illiquid assets. We believe illiquid assets or patient capital can significantly improve member outcomes at retirement. Investment in smaller and medium size unlisted firms, for example, can improve the return expectations for young members with long investment horizons. Similarly, infrastructure can be useful to deliver an inflation-linked income stream that can be beneficial when members retire. More illiquid assets investment by DC schemes will also make a big difference in society given their potential to contribute to projects such as renewable energy.

"We agree with the view that 95% of members are invested in the default arrangement and the majority rarely switch investments, so we are support any recommendation of removing non-regulatory barriers to pension investment. These might include difficulties associated with daily pricing or dealing in illiquid assets. Introducing this would enable members to invest in a wider range of investments and improve risk adjusted returns. However, the current cost of these illiquid assets are relatively high so that even the biggest DC schemes cannot allocate meaningful amounts to these assets. In our view a 5-10% allocation to illiquid assets will not sufficiently improve risk and return characteristics.  The pricing needs to improve so that DC schemes can allocate a meaningful amount into these assets. Furthermore, we need to be cognisant that illiquid assets come with added governance requirements. Therefore, fiduciaries need to be comfortable with the risks attached to these investments, especially one that come with relatively higher risk."