DWP publishes 'disclose and explain' draft regulations for illiquid investments

The Department for Work and Pensions (DWP) has launched a consultation on draft regulations, which will require defined contribution (DC) trustees to disclose and explain their policies on illiquid investment in their Statements of Investment Principles (SIP).

The consultation, which closes on 10 November, also includes requirements for schemes to disclose and explain the percentage of assets in the default funds allocated to different asset classes in their annual Chair’s Statement.

Under the draft regulations, relevant occupational pension schemes will be required to action the new asset allocation disclosure requirements in their Chair’s Statement for the first scheme year ending after 1 October 2023.

In addition to this, the new illiquid investment policy disclosures will be required to be added to the first default SIP of relevant occupational pension schemes published after 1 October 2023, and at the latest by 1 October 2024.

DWP suggested that this timeline would ensure “schemes are giving full consideration to their policy on illiquid investment in a timely manner”.

The consultation defined illiquid assets as: “assets which cannot easily or quickly be sold or exchanged for cash and, where assets are invested in a collective investment scheme, includes any such assets held by the collective investment scheme”.

This was based on stakeholder feedback, with DWP explaining that this definition aims to ensure greater transparency, while remaining as high-level as possible to cover as many types of current illiquid assets as possible, and to leave room for further industry innovation.

However, the government has proposed some level of prescription in order to ensure that disclosures are consistent across all relevant schemes.

In particular, trustees will be required to look through multi-asset investments to underlying investments, so that all illiquid exposures are clearly covered in disclosures and all schemes calculate their asset allocations at asset-level rather than fund-level.

However, the DWP has removed plans for averaging, after responses to its initial consultation demonstrated the "unnecessary burden" that this could put on schemes.

Despite this, the consultation clarified that the averaging method is still recommended, with further explanation on this approach included in the draft statutory guidance for schemes that wish to use it, especially if their asset allocation has fluctuated.

This is not the only amendment to the government's initial proposals, as DWP explained that it decided to remove the previously proposed £100m threshold, in an effort to support greater transparency and create a point of comparison between schemes.

More broadly, the DWP acknowledged stakeholder concerns about the suitability of the chair’s statement for these disclosures, confirming that it has begun engaging with industry representatives and The Pensions Regulator to consider how best to address issues that currently exist with the chair’s statement.

“We will be using the forthcoming Value for Money (VfM) Framework consultation to better understand how the chair’s Statement should interact and fit with the VfM Framework moving forward,” it stated.

Commenting in the ministerial foreword, DWP Secretary of State, Chloe Smith, and DWP Parliamentary Under Secretary, Alex Burghart, said: “Enabling our occupational schemes to take advantage of long-term illiquid investment is one of this government’s key priorities.

“With more members enrolling in DC schemes thanks to the success of automatic enrolment, with the scale of assets invested in DC expected to double by 2030, and the emergence of collective money purchase (CMP) schemes this year, its right that trustees and managers now consider investing in a broader range of assets as part of a diversified portfolio.

“This includes in start-up companies, renewable projects and infrastructure that can offer potentially greater returns for pension savers building towards retirement and can have the added benefits of improving the UK economy and society.

“Industry insight up to this point has been essential, and we welcome the broad support and constructive feedback we have received to the proposal to require schemes to state their policy on illiquid investment and to disclose their asset allocations.

“We are now inviting views on draft regulations and statutory guidance which seek to deliver this proposed policy. The direction is set, and we intend to legislate by spring 2023.”

Alongside these changes, the government has also published draft regulations to exclude performance-based fees from the regulatory charge cap, in an effort to drive greater DC illiquid investment.

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