Patient capital could boost DC pots by 10% - JLT

Investment into patient capital could increase members’ defined contribution pots by 10 per cent at retirement, JLT Employee Benefits has said.

Analysis from the group found that a 20 per cent allocation of “professionally managed illiquid alternatives” could give members’ pots the boost in retirement.

The findings follow a government response to a consultation last week, in which Pensions Minister Guy Opperman urged smaller defined contribution schemes to merge, in order to take advantage of a broader range of illiquid investment opportunities.

Currently, many DC default funds invest in daily-dealt public markets, providing daily liquidity, but do not let DC savers access to illiquid investments despite DC funds long time horizon to retirement.

JLT head of DC investment consulting, Maria Nazarova-Doyle, said: “The focus on daily-dealt funds with near 100 per cent liquidity is a fundamentally impatient approach to DC.

“Many default strategies are currently failing to adequately diversify investments, precluding savers from the valuable illiquidity premium that can be accessed through alternatives.”

According to a JLT case study, a member’s pot could be boosted by 8 per cent through a diversified portfolio; 80 percent in listed equities, 10 per cent in private equity and 10 per cent in infrastructure equity.

Furthermore, the pot could be increased by 12 per cent if a 20 per cent allocation is made to diversified illiquid private equity, with the remaining 80 per cent in listed equities.

Nazarova-Doyle added decision makers should now work collaboratively to bring the benefits of illiquid alternatives to DC defaults.

“If savers can’t access their money for 20 years or more, why should they be forced to invest ‘impatiently’ in daily-dealt funds? With a generation of DC savers facing inadequate income in retirement, the pension industry must collaborate with government and alternative investors to create the new solutions.”

Despite this, JLT highlighted some of the risks to investing in illiquids, including high failure rates, the potential for large dispersion of returns and difficulty in valuation in certain market conditions.

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.

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