SPP outlines ‘main barriers’ to DC illiquid investment

The ‘main barriers’ to DC investing in illiquid assets come from the need to offer DC members daily valuations, daily liquidity, to comply with permitted links and issues arising from performance-related fees and fee look through, the Society of Pension Professionals (SPP) has stated.

In its response to the Department of Work and Pensions’ (DWP) consultation Facilitating investment in illiquid assets by defined contribution pension schemes, the SPP identified these barriers and stated that the success of measures to tackle them will be crucial to the future of DC investing in illiquids.

The report said the DWP’s solution of a ‘Disclose and Explain’ policy may not alleviate these barriers, but added that it could necessitate a periodic review of whether the reasons for not investing still held true.

The SPP stated that, whilst it supported the disclosure of default asset allocation, including illiquids, in Chair’s Statements, it believed it should not also include a policy explanation.

The SPP stated its belief that a ‘snapshot’ disclosure is adequate and would be an appropriate disclosure that would achieve what they believe to be the intended policy aims.

SPP Investment Committee chair, Natalie Winterfrost, commented: “These proposals are being made in the context of ever increasing reporting obligation which apply to pension schemes, in particular additional requirements concerning their Statements of Investment Principles, introduced in 2018 and 2019, and, for certain schemes, new requirements to report in accordance with the Taskforce on Climate-Related Disclosure recommendations.

“We therefore note that it is essential that any further reporting obligations are proportionate, and we address this throughout our response.

“We agree that the scope of this ‘Disclose and Explain’ policy should be restricted to DC only and the DC section of hybrid schemes and not extended to DB schemes. Specifically, we do see a role for illiquid investments in DC schemes. Liquid markets have delivered good returns historically, but a broader opportunity set is needed going forward.”

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