Patient capital at risk of being ‘half measure’ for DC investments

Written by Theo Andrew
02/11/18

The government must look beyond patient capital when it comes to opening up defined contribution schemes to illiquid assets, it has been suggested.

Commenting on the initiative announced in the Budget on Monday, 29 October, JLT Employee Benefits head of DC investment consulting, Maria Nazarova-Doyle, said that if the government only looks at patient capital as an illiquid DC investment approach then it risks becoming a “half measure”.

The pensions industry has been lobbying the government for a number of years to try and open up illiquid investments for DC schemes, and while Hammond’s announcement may be welcomed by many, it has also be branded as a “narrow” investment strategy.

Hammond said the government and the Financial Conduct Authority (FCA) will consult on how to billions of pounds of DC pension money to fund fast-growing British technology companies, while several of the largest pension schemes, including Nest, Aviva and HSBC will work with the British Bank on to explore options for pooled investments into the patient capital.

Nazarova-Doyle said: “Up until this point everything was very rosy, the government wanted pension schemes to access illiquid, the industry wants pension schemes to access illiquid, on the DC side, then the Budget came out.

“The way it reads, although we will have to wait for the consultation document, is that the government is only looking at patient capital itself ... which then becomes a half measure.

“You wouldn’t want to have it one particular asset type in one country which is the UK, it’s very narrow in terms of the asset allocation. What you would want is a diversified set of alternative investments for the long-term.”

Despite this, Nazarova-Doyle believes it is a step in the right direction, adding: “I don’t think it goes far enough but it does show that illiquids are getting their foot through the door, so I think if the government is going to look at how to implement patient capital, it’s only then a small step to link other alternative investments to it.”

The FCA will consult on how the existing fund regime will enable investment patient capital at the end of this year, as well as updating the permitted links framework to allow “unit-linked pension funds to invest in an appropriate range of patient capital assets”.

Furthermore, Aon partner Joanna Sharples, argues that while diversification is important, in reality liquidity risk means that you wouldn’t put all of your money into patient capital anyway.

“You would want to do a pooled structure with other pension schemes, but to do it on your own schemes would struggle to get the scale for diversification, and the pooling will help reduce the risk for members,” she said.

As part of the patient capital consultation, the DWP said it will look at the function of the pensions charge cap, to ensure “to ensure that it does not unduly restrict the use of performance fees within default pension schemes, while maintaining member protections”.

The government has shown signs of opening up DC investment to other forms of long-term illiquid investments, which is likely to please the industry and benefit savers.

Earlier this month, Pensions Minister Guy Opperman asked the pensions industry to consider putting more investment into infrastructure projects as it looks to remove barriers to investing in the sector.

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