Govt to harness £60bn DC scheme investment for UK illiquids

The government is urging smaller defined contribution pension schemes to merge in order for them to take advantage of a broader range of illiquid investment opportunities, a paper published today, 5 February, said.

In its consultation on DC schemes’ consideration of illiquid assets, Pensions Minister Guy Opperman said that such a move would also improve governance and “nudge” them towards the benefits that these investments, also known as patient capital, can offer.

The consultation, Investment Innovation and Future Consolidation, is an extension of Chancellor Philip Hammond’s Budget announcement, looking pave the way for billions of pounds of DC pensions money to fund fast-growing British technology companies.

According to the government, assets in occupational DC schemes have almost tripled to £60bn since the start of 2011 and have been boosted by the introduction of automatic enrolment into workplace pensions.

The government has since said that it will be looking to generate investment into the wider illiquid landscape, including smaller and medium-sized unlisted firms, housing, green energy projects and infrastructure.

Writing in the forward, Opperman said: “DC schemes are currently both smaller and less diversified than their DB counterparts. With phasing of automatic enrolment contributions now almost complete, both master trusts and the largest corporate schemes are reaching a size where they can invest in less liquid assets – but only a small number so far do.”

Under the proposals, DC pension schemes will be required to conduct a triennial assessment on whether their members will receive better value if their scheme was consolidated, a move Royal London director of policy, Steve Webb, believes could become a “tick box exercise”.

“The government admits that large numbers of small pension schemes already fail to meet even basic rules and regulations about how they operate. Giving them another duty to review their scale once every three years risks being no more than a feeble tick box exercise.”

The government has also said that it is looking at ways to “accommodate” performance fees within the charge cap, currently 0.75 per cent, but that it will not “reduce protections for members”.

“Most pension schemes charge well within the charge cap, and have ample opportunity to diversify beyond listed equities and bonds. I recognise, however, that the current methods of assessing charge cap compliance permit only the narrowest range of performance fees,” Opperman added.

Furthermore, the government said that larger pension schemes should be required to set out their policy in relation to illiquid investments, in order to “stimulate trustees’ appetite” for wider investment opportunities.

Pensions and Lifetime Savings Association policy lead and investment and stewardship, Caroline Escott, commented: “We welcome the opportunity to feed further into the government's thinking on consolidation.

“However, it's important to ensure schemes and trustees retain the freedom to invest as they wish in the interests of their members, so any new rules must respect that freedom and not be overly prescriptive.”

In December, the Financial Conduct Authority launched a consultation on permitted links, aimed at addressing “unjustified barriers” for defined contribution pension schemes looking to invest in patient capital.

The consultation will please many in the industry who argued that the government must look beyond traditional patient capital when it comes to opening up defined contribution schemes to illiquid assets.

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