COVER STORY
schemes looking to access more alternative assets
drowning in liquidity Solutions for pension
Why your default is By Sophia Imeson F 20
roman aeroplane, it is easy to mistake the blue-grey expanse stretched across a few acres of UK farmland for water. But on closer inspection, it turns out to be a large grid of solar panels turned up
towards the sky. They belong to a solar farm acquired by
institutional investment manager Greencoat Capital last year. The circa £12bn Mineworkers’ Pension Scheme is one of several defined benefit pension funds that has invested with the manager, listing a £44m allocation to Greencoat Solar in its £239m infrastructure portfolio. Like the mineworkers’ scheme, for years many
DB funds have been taking advantage of the potential diversification and illiquidity premiums associated with real assets such as infrastructure. The same cannot be said for their defined contribution counterparts, to the frustration of the pensions industry and policymakers. Many argue that DC members, lots of whom are
long-term investors, should also be able to reap the benefits of alternative investments. But with several barriers standing in the way of illiquids in DC defaults – from poor understanding, operational challenges and costs – the question is ‘how?’.
Long-term horizons A saver in their early 20s may not retire until they are in their 70s. That is around 50 years of investing – plenty of time to take advantage of
similarly long-termilliquid assets throughout their pot’s growth phase. “Younger members have a long time horizon and should be able to benefit from the illiquidity premium,” says Alistair Byrne, head of Emea pensions and retirement strategy at State Street Global Advisors. “This may be less applicable for members closer
to retirement, but some private market assets have income streams that could be attractive to members in retirement,” he adds. But illiquid assets seldom appear in DC
portfolios. Instead, a large proportion of schemes’ assets are made up of publicly traded equities. Research by Spence Johnson, before it became part of Broadridge Financial Solutions, showed that in 2016, 63 per cent of DC scheme funds were invested in equities. Thirteen per cent were invested in fixed income, 15 per cent in multi- asset, 5 per cent in cash and 5 per cent in property and other assets. More recently, a survey by LCP, published in
December 2018, showed 36 per cent of schemes had allocated more than 75 per cent of the initial growth phase of their default strategy to equities. While equities are a good long-termasset for
younger members, LCP’s report stresses that schemes should consider other ways to access growth, such as private markets, which could result in better risk-adjusted returns. However, it acknowledges that there are still challenges faced by DC plans looking to invest in
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