‘Wholesale change’ required to give DC savers access to private markets

Wholesale change is needed to grant defined contribution (DC) pension savers access to private market investments, according to the DC Investment Forum (DCIF).

The organisation’s white paper, A Whole New Investment Universe, sets out its recommendations to pension schemes, regulators, asset managers and platforms to assist the sector in overcoming the barriers to investing in private markets.

It urged schemes to keep “an open mind” about private markets, and to challenge their assumptions and expectations about where returns should come from.

Additionally, the DCIF encouraged schemes to challenge investment managers and platforms to make private market opportunities available, and to monitor the Productive Finance Working Group’s progress on the Long-Term Asset Fund.

Regulators were called upon to harmonise their thinking on private markets. The DCIF pointed to the example of the charge cap on DC investments, which it said sent the message that investment fiduciaries should seek low-cost investments, while the government was keen for investment in areas like patient capital, which can cost more to research and manage.

Department for Work and Pensions (DWP) senior policy adviser, Andrew Blair, commented: “All of us – Treasury, DWP, The Pensions Regulator – our position continues to be that this is something that trustees of DC pension schemes should be exploring much more than they are at the moment.

“However, we would not like to steer investment in any way – the independence of trustees from government is vital.”

The DCIF urged asset managers and platforms to explain private markets more clearly, using consistent terminology.

“It is often challenging for trustees to make well-informed decisions on their use of illiquids,” said XPS Pensions Group head of DC investment, Alan Greenlees.

“The asset class, in its broadest sense, is opaque and complex. Making progress on illiquids needs to start with clear definitions, to help to define what we mean when we talk about the market and to remove the ambiguity.

“We also need to better articulate the benefits to members of investing in illiquids, to help the conversation to move to that next stage.”

Investment managers were encouraged to “carefully consider” the nature of DC schemes’ concerns about cost, with the DCIF stating that more could be done to make private markets more accessible to DC schemes.

In interviews with stakeholders, the Pensions Policy Institute (PPI) found that stakeholders believed asset managers needed to move away from performance fee structures or cap performance fees to remove some of the barriers to private markets.

Additionally, the report said that platforms could start to engage with their DC clients to assess their appetite for private markets.

PPI interviewees felt that platforms should find a solution to daily pricing, suggesting that they use monthly pricing and put that in every day as the price, or come up with some other pragmatic option.

“It is clear that change and innovation needs to come from a combination of government, consultants, fund managers and platforms,” said PPI head of policy research, Daniela Silcock.

“Governance resource is another key challenge for schemes which are looking to invest in illiquids, and for smaller schemes, accessibility and affordability are both issues.”

DCIF executive director and report author, Louise Farrand, concluded: “For a long time, we’ve suspected that the barriers to investing in private markets exist throughout the DC investment chain. But it has always been difficult to establish exactly what needs to change in order to give DC savers access to a wider universe of investment opportunities.

“We hope that together, the invaluable work of the Pensions Policy Institute and this paper will help the pensions industry to take a collective step further towards addressing them.”

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