DWP consults on ‘disclose and explain’ policy for pension schemes’ illiquid investments

The Department for Work and Pensions (DWP) has published a consultation on proposals for defined contribution (DC) pension schemes to “disclose and explain” their policies on illiquid investment in their Statements of Investment Principles (SIP).

The consultation also proposed introducing regulations that would require relevant DC schemes with over £100m in assets too publicly disclose and explain their default asset class allocation in their annual Chair’s Statements.

These proposals are part of the government’s drive to encourage DC schemes to increase their investment in illiquid assets.

Trustees would be required to include an explanatory statement on their policy towards investment in illiquid assets in their triennial SIPs, including references to what illiquid assets are, whether the trustees choose to invest in illiquids, which members will be holding illiquid assets, a description of these allocations, why trustees decided to invest in illiquids, what factors they considered, any barriers to illiquid investment and any future plans for investment in illiquid assets.

The DWP stated it would like trustees to have a platform to describe the average percentage holding and type of illiquid assets they have in their default asset allocation, and the benefits they feel these assets bring to their scheme and members.

It would also like to understand why other schemes choose not to include these assets in their default arrangements.

Under its proposals to require DC schemes with over £100m in assets to disclose and explain their default asset class allocation in their Chair’s Statements, disclosures on the percentage of assets allocated in the default arrangement to each of the seven main asset classes will be required.

The seven asset classes are cash, bonds, listed equities, private equity, property, infrastructure and private debt.

The DWP stated that it believed members “deserved to have access” to this information.

However, it noted that disclosure was not uniform, which made it difficult for members to compare across schemes and across the various pension pots they may hold.

As of this year, DC scheme trustees will be required to disclose net investment returns to their members.

The DWP said that information about asset allocation could complement the investment return information to ensure members have “more comprehensive information” at their fingertips.

“We propose to issue guidance to describe the way in which we propose trustees should disclose this information,” it stated.

“Issues that are discussed in this consultation document, for example, age-specific disclosures, averaging, presentation etc. would be tackled in guidance rather than hardcoding into regulation.

“We will aim to find the right balance between creating consistency and enabling trustees, who ultimately know their membership best, to be creative and adaptive.”

Commenting on the consultation, Pensions Minister, Guy Opperman, “I am passionate about ensuring pension schemes have the necessary information, and a broad range of options, to deliver the best possible outcomes for the record number of Brits now saving for retirement.

“Opening up greater illiquid asset options to DC scheme investment will help do just this and enable schemes – and savers – to benefit from more diversified portfolios, while also bolstering the role pension investments can play on our journey to a carbon-free economy.”

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