Articles - Investment opportunities for DC schemes set to expand

The Department for Work and Pensions (DWP) launched a wide-ranging consultation on facilitating investment by defined contribution (DC) pension schemes in illiquid assets. The consultation set out three main proposals designed to expand the investment options for occupational DC schemes to include more exposure to illiquid assets, such as small and medium-sized unlisted firms, social housing, green energy projects and other infrastructure – often collectively referred to as ‘patient capital’. The consultation period closes on 1 April 2019.

 By Guy Plater, Head of Operations at XPS Pensions Group
 There is a strong investment case for increasing the diversification of the range of assets in which DC members can invest and providing an opportunity to benefit from the illiquidity premiums associated with long-term investing.
 Smaller scheme consolidation

 The first proposal involves the requirement for small DC schemes to conduct a triennial assessment as to whether it might be in their members’ interests to transfer to a ‘larger scheme with more scale’, such as a master trust. The argument behind this proposal is that additional scale would help to remove a barrier to investing in less liquid assets and would improve overall DC scheme governance.

 The DWP suggests that the results are published as part of their Chair’s Statement. 

 Charge cap barrier 
 The second proposal attempts to address the way in which the current charge cap applying to default funds may also be a barrier to investing in illiquid assets. Since April 2015, there has been a charge cap on the default funds of DC schemes used for automatic enrolment to protect members from excessive charges. The cap is set at 0.75% per annum of the funds under management.

 Funds that invest in illiquid assets typically levy a performance-related fee, which can make it difficult for trustees to determine whether a default arrangement complies with the 0.75% charge cap. The DWP therefore proposes to allow the use of an additional method for assessing compliance with the cap so that performance-related fees can be considered.

 Reporting on investing in illiquid assets
 Finally, the third proposal from the DWP is that ’larger’ DC schemes (those with assets above £250m or £1bn, or with more than 5,000 or 20,000 members) be required to:
 • Document and publish in the main Statement of Investment Principles (SIP), their policy regarding the use of illiquid assets; and
 • report annually on how they have followed this policy.

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