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DWP plans to promote illiquid investments “could increase scheme costs without improving member outcomes” – Laura Myers, LCP

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Responding to the DWP’s latest consultation on ‘facilitating investment in illiquid assets by DC pension schemes’, consultants LCP have argued that the measures – though well-intentioned – could fail to achieve their objective whilst adding to scheme costs.  The consultation closes on Wednesday 11th May.

Under the DWP proposals, the trustees of larger Defined Contribution pension schemes would have to:

  • State their policy on investment in illiquid assets
  • Disclose their holdings of illiquid assets on a quarterly basis

Information would need to be included in the scheme’s ‘statement of investment principles’ and in the annual chair’s statement.

In their consultation response, LCP raise a series of objections to these proposals:

  • The information would be included in documents which are rarely read by scheme members. It is therefore highly unlikely that they would lead to members becoming more engaged with scheme investment strategy, as the consultation suggests.
  • There would be a cost to gathering this data, especially on a quarterly basis, which would ultimately add to the costs of running the scheme to the potential detriment of members; in particular, quarterly reporting adds little value when DC pension schemes invest for the long term and therefore typically review strategic allocations of investment strategy on an annual or triennial basis;
  • These proposals would not tackle the real barriers which do exist to DC schemes investing more in illiquid assets.  These barriers can include concerns about the fairness of assets priced monthly or quarterly that can be sold by members daily and the tension between member needs/regulation for ready access to DC funds and the need to tie up money in illiquid investments for longer periods.  LCP say that regulatory clarity from DWP on this point would help schemes gain comfort to invest.

Commenting, Laura Myers, Partner and Head of DC at LCP said:

“The DWP’s aim to remove barriers to investment in illiquid assets is well-intentioned, but these latest proposals risk adding a regulatory burden whilst delivering little for members.  Member engagement is unlikely to be enhanced by adding complex financial information into little-read documents, especially as these requirements only relate to the ‘default fund’ investments which apply to the least engaged scheme members. 

Requiring quarterly reporting of holdings of illiquid assets seems unnecessarily costly and burdensome, especially as many schemes may only make strategic decisions about their asset allocation on an annual or triennial basis.

Most DC trustees would be willing to consider greater investment in illiquid assets but face barriers which will not be addressed by these latest proposals.  In particular, trustees need greater guidance from government on how best to reconcile greater use of investments which involve less frequent pricing and the ability consequently for members to ‘win’ and ‘lose’. We also have the issue of tying up funds for long periods with the demands of members who expect access to their funds at short notice.

As things stand, these proposals could increase scheme costs without improving member outcomes”.

** ENDS **

Notes to editors: The full consultation can be found at: https://www.gov.uk/government/consultations/facilitating-investment-in-illiquid-assets-by-defined-contribution-pension-schemes.

LCP’s full consultation response is available on request.

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