Illiquid investment proposals 'could raise costs without improving member outcomes'

The Department for Work and Pensions’ (DWP) proposals to facilitate greater investment in illiquid investments by defined contribution (DC) pension schemes could risk increasing scheme costs without improving member outcomes, LCP has said.

In its response to the DWP’s consultation, the consultancy warned that whilst the measures may be well intentioned, they could fail to achieve their objective of improving member outcomes.

Under the proposals, trustees of larger DC schemes would be required to state their policy investment in illiquid assets and disclose their holdings of illiquid assets on an annual basis through annual documents, such as the Chair's Statement.

However, LCP raised concerns that the information would be included in documents that are rarely read by scheme members, saying that it was highly unlikely that the measures will lead to members becoming more engaged with scheme investment strategy.

It also pointed out that there would be a cost to gathering this data, especially on a quarterly basis, warning that this could add to the costs of running the scheme to the potential detriment of members.

More broadly, the firm said that the proposals do not tackle the real barriers facing DC schemes when looking to invest in more illiquid assets, such as concerns about the fairness of assets priced monthly or quarterly that can be sold by members daily.

It also raised concerns around the tension between regulation for ready access to DC funds and the need to tie up money in illiquid investments for longer periods, stating that regulatory clarity on this point could help schemes gain comfort to invest.

Commenting on the concerns, LCP partner and head of DC, Laura Myers, said: “The DWP’s aim to remove barriers to investment in illiquid assets is well-intentioned, but these latest proposals risk adding a regulatory burden whilst delivering little for members.

“Member engagement is unlikely to be enhanced by adding complex financial information into little-read documents, especially as these requirements only relate to the ‘default fund’ investments which apply to the least engaged scheme members.

“Requiring quarterly reporting of holdings of illiquid assets seems unnecessarily costly and burdensome, especially as many schemes may only make strategic decisions about their asset allocation on an annual or triennial basis.

“Most DC trustees would be willing to consider greater investment in illiquid assets but face barriers which will not be addressed by these latest proposals.

"In particular, trustees need greater guidance from government on how best to reconcile greater use of investments which involve less frequent pricing and the ability consequently for members to ‘win’ and ‘lose’.

“We also have the issue of tying up funds for long periods with the demands of members who expect access to their funds at short notice.

“As things stand, these proposals could increase scheme costs without improving member outcomes”.

Commenting in response to the concerns, a DWP spokesperson said: “Opening up greater illiquid asset options to defined contribution pension schemes will help enable them to build better diversified portfolios more easily, while also having the potential to improve saver outcomes.

“Our new proposals aim to increase transparency, comparison and competition within the defined contribution market, which has become dominated by a focus on low cost above all other measures of value.

“We plan to engage further with industry and other stakeholders to explore how the feedback received at consultation can feed into the design of future policy.”

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