Majority of pension schemes expected to increase illiquid asset investments

The majority (85 per cent) of UK pension scheme investors expect the schemes they work for to increase their allocations to illiquid assets over the next three years, with 7 per cent expecting a significant rise, research from Alpha Real Capital has found.

The survey showed that schemes already have substantial allocations to illiquid assets, with over half (58 per cent) of investors stating that their scheme allocates up to 25 per cent to illiquid assets as part of their investment strategy.

Almost two-fifths (37 per cent) of pension professionals said that they allocate up to 10 per cent of their portfolio to illiquid assets, while 3 per cent allocate more than 25 per cent, and just 2 per cent said that they have no specific allocations to illiquid investments.

Increased transparency around the asset class was the main reason for the rising interest, cited by 79 per cent of pension professionals, while 69 per cent cited increased opportunities to invest in illiquid assets.

In addition to this, nearly half (44 per cent) of respondents pointed to the diversification benefits as driving increased interest, and 8 per cent said that improvements in the premium for investing.

The survey found that most investors are happy with an additional premium of less than 1 per cent for illiquid assets, while over half (58 per cent) said they expect an additional premium of between 0.5 per cent and 1 per cent, and 4 per cent will settle for less than 0.5 per cent.

In contrast, just over a third (34 per cent) expected a premium of between 1 per cent and 1.5 per cent, and 4 per cent look for an additional premium of more than 1.5 per cent.

Alpha Real Capital head of client solutions, Boris Mikhailov, stated: “Illiquid assets offer the opportunity to earn a premium above more liquid assets which helps explain their growing popularity with pension scheme investors.

“With returns on some other asset classes squeezed, it makes sense to consider illiquid assets and nearly six out of 10 schemes are already allocating up to 25 per cent to the sector and the overwhelming majority are using illiquid assets in some shape or form.”

Alpha Real Capital CDI director, Shajahan Alam, added: “Pension funds are increasingly looking for certainty of returns through contractual cashflows, higher yields and portfolio diversification. This means growing allocations to illiquid assets.

“For example, Commercial Ground Rents and Lifetime Mortgage assets can deliver steady and reliable returns that match pension scheme cashflows while generating between 4 per cent to 5 per cent per annum above comparable government bonds. Commercial Ground Rents provide the added benefit of being inflation linked.”

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