Sonia Kataora, Partner and Head of DC Investment at Barnett Waddingham comments: “It’s certainly an interesting time to be talking about investing in illiquid assets, with the Woodford saga finally wrapping up after four long years. However, to draw comparisons between DC pension scheme investment portfolios and retail funds does the issue a disservice.
“By their nature, DC schemes have, and will continue to have, more people paying in money than withdrawing it, especially as DC becomes the dominant workplace pension system for UK employees. This is good news for DC scheme net cashflows, and so illiquidity poses less of an issue when managed correctly.
“The benefits of investing in less liquid assets such as infrastructure and private equity are plentiful. They can enable investment strategies to seek better levels of growth than public markets, but with potentially less swings in members' pots (as private markets tend to be untethered to public markets). They can provide potentially better inflation protection - which is especially true for transport and utilities assets that have an explicit link to inflation baked into contracts – and can offer positive contributions towards sustainability objectives.
“Of course, these benefits must be balanced by the risk, and any investments must be well managed. Trustees can invest in blended funds with a majority of liquid assets and a small minority (c. 10%) of illiquid ones, which allows for better protection and cashflow management. And any investment decision process must include scenario planning and comprehensive due diligence, as ever. The DC pensions market is highly regulated and well governed; it must be allowed to make bolder investment decisions to ensure the best return for members.”
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