COVER STORY
Schemes pare back equity allocations 20 years prior to retirement
Average proportion of default strategy assets invested in equities in the run-up to retirement by scheme type, 2018
10 years prior to retirement At retirement %
10 20 30 40 50 60 70
0
Master trust/ multi-employer
Source: Pensions Policy Institute
The average proportion of assets invested in equities 20 and 10 years prior to retirement has decreased from 2017, according to research by the Pensions Policy Institute. Previously, master trusts, stakeholder and group personal pension plans had 67 per cent, 79 per cent and 76 per cent, respectively, of funds invested in equities on average 20 years prior to retirement. Nevertheless, exposure to equities remains high. While Hymans Robertson’s Mark
Jaffray agrees that the industry’s increasing focus on illiquids is good,
he argues that schemes still do not diversify themselves enough in the listed markets. For example, he notes that in equities it is very unlikely to see a global small-cap allocation in a DC portfolio. “Why? It’s easy to access. And similarly, on debt, for many DC schemes you wouldn’t necessarily see a global debt allocation,” Mr Jaffray says. “One of the challenges to trustees is
not somuch to get themselves up to speed with the illiquids, but have they exhausted all the easy possibilities – the ones they could tick off a lot easier to listed alternatives first?” he adds.
Trustees need to make sure they knowexactly
what they are buying, agrees Ms Nazarova-Doyle. But she is not convinced that the Woodford events will have a negative impact on trustee confidence in investing in illiquids for DC. “That situation was completely different –
everybody thought that the fund was liquid, whereas actually it turned out to be illiquid.” If trustees make sure they have carried out all
their due diligence, the likelihood of any similar shocks is slim. “What we’re saying here is... this is illiquid, and as long as we all understand that this is what we’re buying and this is howit works, then we should not get any surprises,” she says. In DC schemes, members could be investing for decades. Ms Nazarova-Doyle notes that it
24
CHARGE CAP ON AUTO- ENROLMENT DC DEFAULTS WAS
PER CENT A 0.75 Stakeholder
Group personal pension
therefore makes little sense to invest them in daily dealt public markets when there are many other potentially lucrative and long-term investment opportunities available.
Cost and scale The real problem with illiquid assets looks to be their cost under current fund offerings, which has so far limited their uptake to the largest master trusts. Master trust Nest announced last year that it was
seeking innovative ways of accessing private credit – one of the asset classes considered too costly and illiquid for DC schemes. But with more than 6m members, Nest has the scale, assets and capability that many smaller schemes do not, making it easier to plump for more illiquid assets. “If you’re a big scheme and you want to allocate 5
per cent to say private debt or private equity, then that’s a lot more money and a lot more governance oversight that you’re likely to have with that type of scheme, so therefore you’ll naturally have all the facilities to go out and do that,” says Mr Jaffray. Cost is also a problem for smaller to medium-sized
DC pension plans. Mr Jaffray adds: “For a small scheme, the only practical way of getting access is to buy into a pooled fund, and if the pooled fund has a really high fee then you’ve got charge cap considerations to think about.” In 2015, a charge cap on auto-enrolment DC defaults was introduced. The government’s pensions charges survey in 2016 showed that average annual charges for schemes that are subject to the 0.75 per cent cap are between 0.38 and 0.54 per cent of funds under management. In its illiquid assets consultation, theDWP states
that it is therefore clear trustees have scope to consider innovative investment opportunities, which may attract higher charges. However, it admitted that the way compliance with the charge cap is currently determined could restrict trustees’ options. “Because we’ve come so far down on costs,
starting to introduce slightly more sophisticated, interesting asset classes – whether that be illiquids or whether that be ESG or whatever – I think we’re going to start seeing costs for members starting to go back up again, which I think is probably a good thing,” says Mr Parker. “For a small increase in costs you’re potentially getting a multiple back in terms of improved returns.” But even if managers reduce fees to meet the DC
INTRODUCED IN 2016
market, cost will still be a big driver when it comes to deciding on the exact allocation to illiquids, Mr Parker says. “If you look where the DB market has ended up and use that as a rough proxy, it’s kind of that 10-20 per cent area that I think we’ll see being allocated over time,” he adds.
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