The Department for Work and Pensions has undertaken consultation to elicit views on its paper "Broadening the investment opportunities of DC pension schemes".
In January 2023 the government published their response for chapters two and three of this paper, in which they provided details of a few changes intended to strengthen the regulations and guidance following feedback to the consultation.
The DWP’s aim to remove barriers to investment in illiquid assets is reassuring.
The guidance and regulations are intended to encourage trustees to consider illiquid investments by requiring them to disclose and explain their policies on illiquid investment and reflect on whether their current investment policies and asset allocations align with market changes and whether their investments are still in their members’ best interests.
There is also an expectation that this enhanced communication could help members better understand the investments made on their behalf, which could in turn help drive up overall pensions engagement.
What are illiquid assets?
Illiquid assets are normally assets that cannot be easily or quickly sold or exchanged for cash without a substantial loss in value.
These assets include, but are not limited to:
- Direct property investment.
- Investment in infrastructure projects.
- Private equity.
- Private debt.
As privately held assets, the trading of illiquid assets takes time due to the bespoke nature of the asset and therefore more due diligence is required prior to purchase.
Given the infrequent trading, there may be a lack of consensus on valuation, hence terms of the deal require time-consuming negotiations.
The case for illiquid investments in DC schemes is strong as DC members are long-term investors.
Therefore, these investments have greater trading costs and greater idiosyncratic investment risks, including that a willing buyer may not be present at a given point in time, creating illiquidity.
The case for illiquid investments in DC schemes and potential challenges
At Buck we believe that the case for illiquid investments in DC schemes is strong as DC members are long-term investors, similar to defined benefit schemes, and therefore can take advantage of the key characteristics of illiquid investments.
Some of these key advantages from illiquid investments include:
