How can the pensions market help diversify DC savings?

Narrowing this gap was identified as a key driver for government by pensions minister Laura Trott in her keynote address to Onward, which she delivered the day after chancellor Jeremy Hunt's Mansion House speech.

But while many who represent pension providers are clamouring for this gap to be filled by additional contributions, the government says we can be smarter than that by squeezing more out of the contributions that are already being paid.

For a long time now, this has meant a relentless focus on costs and charges – until the Mansion House Compact, which articulated a new direction.

The chancellor identified “that some DC schemes may not provide the returns their pension fund holders expect or need”. And he attributed the lowly investment returns to “UK institutional investors not investing as much in UK high-growth companies as their international counterparts”.

The drive to increase holdings in private equity and unlisted illiquids is on.

And while several of the large fund managers have signed up to increasing the allocation to 5 per cent of their default funds by 2030, the Department for Work and Pensions is introducing a slew of changes that will facilitate and encourage the less willing converts.

Putting DC funds into illiquids can be like putting a square peg in a round hole.

The new focus of value for money is now moving away from containing costs and in the direction of investment performance.

Regulators are to be given beefed up powers to close down underperforming schemes.

The drive to consolidate Britain’s pensions into fewer larger schemes is being given added impetus on the premise that it is more realistic to expect larger schemes, where cash flows should be more stable, to make meaningful allocations to illiquid investments.

There are several ways that DC pensions may be able to do this.

Lifts to better long-term prospects

Hunt is putting his money where his mouth is, with a prize fund of £250mn for a competition to find new ways to unlock DC investment in illiquids.

This initiative – Long-term Investment for Technology and Science (Lifts) – specifically supports UK-based science and technology-led firms with a heavy research base.

The idea is to stimulate DC schemes to invest in UK start-ups and scale-ups that need funds for research and development to get them to the next level of growth.

The programme has an ambitious set of targets and the winning propositions that will get this government seed capital to bring their ideas to fruition will be announced in the Autumn Statement. 

Keep your eyes peeled, there could soon be a Lift near you offering fresh investment opportunities for your clients. 

LTAFs stimulating investment in private assets

Then there are long-term asset funds (LTAFs). The government green lit DC pension schemes to invest in LTAFs back in November 2020 and the first two gained Financial Conduct Authority approval earlier this year. 

Putting DC funds into illiquids can be like putting a square peg in a round hole, with the daily danger that DC members can ask for their money back at one day’s notice.

For anything but large listed equities, that entails the risk of a dreaded fire sale, and assets being quickly disposed of at a fraction of the value once attributed to them.