24 November 2022
Investment strategy for defined contribution schemes has been a developing area for as long as I have been in the industry. But today feels like a milestone; a final piece of the jigsaw. Today the Productive Finance Working Group issued their guidance on investing in less liquid investments having spent time working through the barriers and issues holding back DC scheme investment, alongside a call to action for investment platforms.
The Group’s work to investigate and understand what actions need to happen to enable more DC schemes to invest is well received. As has been the Government’s and regulator support in initiating this work and supporting the removal or relaxation of previously prohibitive barriers. Our view has always been that trustees of DC schemes should have the very same investment opportunities afforded to help their members as available to DB scheme trustees. Why should DC scheme design be thought of as a poor relation?
We have worked with a number of schemes to implement private market investments. However, on each occasion, the process through to investment has been limited due to the constraints placed on DC schemes. With these now easing, more DC schemes of all shapes and sizes should find private market investment is now more open to them to consider, as part of developing their default investment strategy.
Private markets do of course come with more risk – it’s not all plain sailing. In our discussions with schemes, we find that the key concern revolves around fairness to members, which is affected due to the lack of daily pricing and the less frequent valuation process. Yes, there are aspects of liquidity management, which involves pension cashflow forecasting, as well as stress-testing portfolios to understand extreme market impacts, however, these issues are more easily managed through the latest fund and platform developments. Equally, there is the subject of fees, which tend to be higher than other investment options – but even there we are seeing movement. What I am grateful for is we now have the ability to have these conversations, to access illiquid assets as an opportunity for DC savers, rather than it being dismissed as an investment opportunity in DC for operational reasons.
It’s positive to see the fund management industry making great progress in developing solutions that will appeal to DC schemes. We are meeting with managers on a weekly basis to hear about new developments or receive progress reports on launches. The latest generation of multi-asset private market funds is expected to be more commonly available across platforms which will allow schemes of all sizes to make their first allocations. Given the bleak outlook for more traditional asset class returns for DC, these new investment opportunities are welcome and timely.
Private market investment has been progressing in DC for the very largest of schemes. However, with this initiative, we expect it should be something that all DC schemes can be considering for their members. The Government and regulators have done much to help, particularly with the LTAF structure. I hope we will now take this opportunity forward.