Pensions  

’Crazy’ obsession with DC liquidity must end: BlackRock

’Crazy’ obsession with DC liquidity must end: BlackRock

Defined contribution schemes must overcome a “crazy” commitment to daily liquidity if they are to meet members’ retirement needs, according to BlackRock’s head of retirement for Europe, the Middle East and Africa.

Tony Stenning said workplace schemes heavy with younger members can afford to put as much as 30 per cent of their total assets in illiquid investments like private equity, real estate and infrastructure.

“We need to rediscover long-term investing,” he said. “When you’re investing for 30, 40 or 50 years, to have a daily liquid product is crazy.”

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He pointed to the Danish system, where some funds have a third of pensionsers’ savings in alternative assets, which are less easy to trade quickly.

“They think that’s about the right level to maintain the liquidity requirements, but also to enable them to secure the illiquidity premium on offer in these other investments,” he said. “If we can get the regulatory regimes aligned with the member requirements [in the UK], it will allow us to secure those benefits.”

Without a deeper embrace of long-term assets with reliable returns, Mr Stenning said the looming longevity crisis could leave new generations worse off than their parents.

“We estimate that around 2035 there will be a tipping point in our society where a generation retires worse off than the previous one. That won’t have occurred for 100 years, since the creation of the welfare state and has properly profound impacts to the UK and to the long-term growth aspects of our economy,” he said.

BlackRock research found ‘millenials’ – the generation born between the early ‘80s and late ‘90s – were the most likely to underestimate their longevity, on average expecting to live to 79, whereas the true figure is around 90.

Mr Stenning said failing to factor in those extra 11 years would have “a profound impact” on retirement planning, leading them to underestimate how much they would need in their pension pot at retirement by around £100,000.

But Colin Low, managing director of Kingsfleet Wealth, pointed out liquidity needs varied from client to client.

“There will be some clients for whom liquidity will be absolutely paramount, and even more so with pension freedoms.” For others, such as younger investors or those with alternative sources of income, he said liquidity was irrelevant.

Direct commercial property was the illiquid asset most favoured by his clients, particularly those with small businesses, he said.

james.fernyhough@ft.com