Scheme costs ‘could increase’ under plans to promote illiquids

It comes as the government’s consultation on facilitating investment in illiquid assets by defined contribution pension schemes, which opened in March, closes to responses on May 11. 

This is part of the DWP’s intention to open illiquid asset classes to DC schemes through proposed reforms that include excluding performance fees from the default fund charge cap. 

The DWP also wants trustees of larger DC schemes with more than £100mn assets to “disclose and explain” their policy on investment in illiquid assets and disclose any current holdings on a quarterly basis. 

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

However, LCP warned in its response to the consultation that these proposals — despite being well-intentioned — could fail in their goal to drive more investment in illiquid assets and risk increasing scheme costs without improving member outcomes.

The response said the information would be in documents that are rarely read by members and would therefore be unlikely to improve member engagement with their scheme’s investment strategy, which the DWP’s consultation suggests.

The consultation closes a day after the government sets out its agenda in the Queen’s Speech on May 10, which has prompted speculation over potential reforms to help facilitate scheme investment into illiquid assets.

In March, work and pensions secretary Thérèse Coffey said that the government would legislate on scheme investment in illiquids.

Increased regulatory burden 

Gathering data on a quarterly basis would increase the costs of running the scheme, adding a regulatory burden while delivering little for members, said Laura Myers, partner and head of DC pensions at LCP.

“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,” she added.

While she acknowledged that most trustees would consider investing more in illiquid assets, she pointed out that schemes face barriers that the DWP proposals would not address.

“In particular, trustees need greater guidance from government on how best to reconcile the 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,” Myers added.

LCP’s response stated that regulatory clarity from the DWP on those points would help increase comfort among schemes to invest in illiquid assets.

More pragmatism needed in regulations

One industry source, who did not wish to be named, told FTAdviser's sister publication Pensions Expert they would be “really surprised” if reforms that would help schemes invest in illiquid assets were not included in the Queen’s Speech.

“You don't necessarily need a new Act of Parliament to get pension schemes to do more on illiquids,” observed former pensions minister Sir Steve Webb, meanwhile.

Callum Stewart, head of DC investment at Hymans Robertson, said his consultancy has a positive view on the potential to improve long-term outcomes for DC savers through investment in less-liquid assets, but warned about adding to the reporting requirements in the chair’s statement.  

He explained: “We are generally supportive of proposals to increase accountability for trustees regarding their policy for investing in illiquid assets. However, as always, the devil is in the detail in terms of regulatory change. 

“We prefer more pragmatism in the regulations to support innovation, given a range of approaches for incorporating illiquid assets are already being adopted. We also advocate not adding to the ever-extending chair’s statement requirements, and instead believe additional reporting requirements sit more naturally in the annual implementation statement.”

Stewart added that there is still too much focus on the level of costs and charges in the industry, and warned that this could be distracting overall efforts to improve outcomes. 

“For example, the level of costs and charges can often be swamped by other factors impacting members’ long-term outcomes such as performance, and quality of service,” he said. 

“More emphasis should also be placed, in our view, on a significant lack of capability from investment platforms to accommodate illiquid assets. We believe investment platforms require significant investment to create the conditions to deliver better long-term outcomes for savers.”

The Pensions and Lifetime Savings Association has also previously warned about the need for investment in illiquid assets to provide value for money to members. 

In its response to DWP’s consultation on investment in productive finance, the PLSA said: “Pension schemes will always be interested in investing in assets which have a strong likelihood of delivering higher returns over the long term, but these opportunities must be cost transparent, suitable for their members and provide value for money.”

Alex Janiaud is deputy editor at FTAdviser's sister publication Pensions Expert

Stephanie Baxter is a freelance journalist