COVER STORY


Operational obstacles However, DC allocations in the main remain well short of the 10-20 per cent sweet spot identified by experts. In an attempt to correct this lag, the


government’s consultation, which closed in April, suggested a requirement for larger DC schemes to document and publish their policy in relation to investment in illiquid assets, as well as reporting annually on their rough percentage allocation to this type of investment. Experts, however, are sceptical as to whether this


would make any real difference. Mr Byrne says: “There is a good case for using


illiquid assets in DC defaults, but it isn’t clear that mandating new disclosures in statements of investment principles is an effective way to create progress.” He points out that there is already a requirement


for plans to have a suitable, well-diversified investment strategy, and to set that out in the statement of investment principles. “It’s more a case of overcoming the practical barriers,” he says. These barriers, acknowledged by theDWP’s


consultation, range from operational problems to a lack of understanding when it comes to certain more sophisticated asset classes. One of the most commonly cited is the current


trend for daily pricing and dealing of DC assets, which has become the norm, particularly for schemes using platforms. Illiquid assets, such as direct property, private


equity or infrastructure, are not easily traded, so providing a daily price or allowing members to cash out immediately is not as straightforward compared with when schemes are invested solely in traditional bonds and equities. “The DC ‘ecosystem’ is set up for daily trading, so


it is the convention and current approach, even if there is no fundamental reason why members need to be able to trade each day,” says Mr Byrne. “It takes time to adjust the system to illiquid


assets and get people comfortable with the approach,” he adds.


There is a good case for using illiquid assets in DC defaults, but it isn’t clear that mandating new disclosures in statements of investment principles is an effective


way to create progress Alistair Byrne, State Street Global Advisors 22


While investments such as private equity and infrastructure are seldom seen in DC portfolios, there are some schemes that invest in property. The Visa Europe Pension Plan’s default lifestyle strategy, for example, invests 47.5 per cent in gilts and bonds, 20 per cent in a multi-asset fund, 10 per cent in cash, 5 per cent in property and 17.5 per cent in global equities at retirement. The scheme introduced white- labelling for the first time last year.


This included the introduction of the Visa Property Fund, which invests in both an existing direct property portfolio and introduces a new allocation to listed property to manage liquidity within the blend. Mercer’s Maria Nazarova-Doyle says that out of all the illiquid asset classes, direct property “is probably the only one that we have seen implemented on quite a number of occasions”. However, “it’s still not as widespread as we’d like it to be”, she adds.


No requirement to offer daily dealing However, the insistence on daily pricing and dealing appears to be something of a red herring. For one thing, in its DC investment guidance the Pensions Regulator states that “most members will not have a need for immediate liquidity of their investments, and it may not always be beneficial for dealing to be carried out daily”. Mark Jaffray, partner and head of DC consulting


at Hymans Robertson, argues that, rather than regulation being the primary obstacle, scheme infrastructure and governance are the main barriers to more alternative investments in DC. Perhaps, then, the real issue is that trustees are uncomfortable with the complexities of illiquid assets? “Some trustees will be more familiar because they have private market assets in DB schemes they oversee, but they may still be nervously applying the same strategies in DC,” Mr Byrne suggests. “The recent events with Woodford suggest


investors can be very uncomfortable with gating and lack of liquidity, so we need to make sure people understand the liquidity profile of what they are investing in,” he adds.


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