Defined contribution – Cover story
even emerging market debt do not have a high duration. So, if anything happens, they will be hit but not hugely because of how much we have allocated to these funds and because of their duration. It’s a tricky act, but we are looking to be nimble.” Nazarova-Doyle also acknowledges the need for greater diversi- fication. “We used to have only equities in our portfolio, mostly developed market, with some emerging nation and some bonds. “About a year ago, it became clear that we caught the end of a bull market and our forecasts were starting to change so we have diversified the funds,” she adds. “We added emerging market debt, REITs and put some hedging in as well. We have hedged 50% of our developed market equity exposure. So, we have started to think about managing for the future and trying to find different sources of return and trying to manage volatility.
“The two big trends for us now are ESG syndication and inte- gration, adding a climate tilt to our equity allocation, and intro- ducing ESG exclusions into our bond funds, that is one area where we are definitely planning to do more all the time,” she adds. For smaller schemes, the cost and liquidity requirements remain a constraint, says David Cooper, head of pensions development at Creative, a £700m master trust that invests on behalf of some 217,000 members. The master trust uses Scottish Widows and Mobius as invest- ment providers but trustees are regularly reviewing the invest- ment outlook. He acknowledges that the trustee is aware of the
changing macro-economic outlook but describes the charge cap and liquidity rules as “restrictive.” Even Bautista still sees challenges in accessing illiquids. “We would like to put more into illiquid long-term investments because our scheme members are long-term investors,” he adds. “But at the moment there are massive practical constraints in terms of costs and the need for daily pricing and liquidity. We try to work innovatively to access illiquid assets, in our property strategies, for example.”
Picking up the mantle
The government and regulators are looking to address these challenges, in part by easing cost restrictions for DC schemes as well as by launching the Long Term Asset Fund (LTAF), which is aimed at encouraging more institutional investment into infrastructure. By offering a platform to pool smaller investments, allowing for a longer redemption period and stronger liquidity management, the government hopes to facil- itate more investments in illiquid assets. The PPI’s Daniela Silcock welcomes the initiative, but stresses that cost still remains an obstacle. “Another factor is the differ- ent pricing structure in private market assets,” she adds. “If the private market wants to sell assets, they should be adjusting their pricing structure so that it works in a way DC scheme pricing works.”
A lot of smaller providers will look at themselves and realise that they are simply not able to provide the best value for money within the
structures they have. Steve Charlton, SEI
Bautista also believes the solution has to go both ways. “It’s got to be a mixture of the regulator and the asset management community coming up with solutions,” he says. “The charge cap is a bit of an impediment but I don’t think it is the main impediment right now. There are practical challenges with the need for daily pricing and liquidity as well as the commercial pressures. Right now, there seems to be a focus on cost, rather than value.” For Nazarova-Doyle, adding illiquidity premia to DC portfolios will be a key challenge going forward. “There is a lot of move- ment, a lot of working groups like the productive finance work- ing group which is working on figuring out how to put illiquids into a DC default strategy.”
The demographics of the DC membership should make the industry best suited to become a long-term liquidity provider. “A person who joined at the age of 18 could stay invested in the portfolio until 15 years before retirement. And we have the money, £48bn of it, but there are still lots of barriers,” Nazaro- va-Doyle says. “So, we try to work with the industry and internally as well to figure out how to make it happen, because DB is dying and DC is becoming the new DB,” she adds. “As DB funds start de-risk- ing into gilts and stop being the source of money to private markets, then DC will just pick up the mantle.”
Issue 111 | March 2022 | portfolio institutional | 25
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