PENSIONS
>>
2022, the UK government updated its consultation document about ‘Facilitating investment in illiquid assets’, saying that excluding performance fees from the cap on charges in default arrangements could help trustees “get the best overall deal for members when investing in private equity and venture capital”. Positive member outcomes should be
// THE RISK OF INVESTING IN LESS LIQUID ASSETS IS OWNED BY THE MEMBERSHIP //
the primary focus, says Mark Searle, head of DC Investment at XPS Pensions Group. “Investing in less liquid assets is incredibly appealing for reasons covering potentially higher returns, diversification, and environmental, social, and governance (ESG) benefits. However, the risk of investing in less liquid assets is owned by the membership and any investment strategy should be mindful of their risk tolerance. This puts a different lens on the decision-making when considering illiquid assets, particularly if the default arrangement is already deemed adequate.” The UK’s relatively young DC
pensions market – DC was common in the US in the mid-1970s, 20 years before it began gaining traction in Britain – currently enjoys far less freedom than those of other countries, yet by 2025, DC pension schemes will have become one of Britain’s largest reserves. According to a 2021 report by the Bank of England, assets are expected to double from
ASSET ALLOCATION AND DB/DC SPLIT Equity
Australia Canada Japan
Netherlands Switzerland UK US P7
Asset allocation 2021 Bonds
Other 53%
30% 29%
36% 41%
29% 50% 45% 28% 56% 47% 31% 62% 31% 34% 30% 13% Cash
22% 38%
12% 12%
4% 3%
12% 4% 7%2% 19% 18% 2% Source: Thinking Ahead Institute and secondary sources P7 = world’s seven biggest pension markets 35% 54% 81% 65% 46% 19% 13% 60%
95% 95%
DB/DC split 2021* DB DC
87% 40%
5% 5%
£500bn today to around £1tn in 2030, a sum which, if invested in illiquids, could seismically transform UK enterprise while giving savers a stake in the real economy.
Weighing up risk Fund managers need to decide what poses the greater danger – the risk of capital loss or the operational risk posed by illiquidity. They can learn from certain notable examples. Australia’s pension assets, for example,
have consistently seen the biggest annual growth, according to the Global pensions assets study 2022 by the Thinking Ahead Institute, founded by WTW, formerly Willis Towers Watson. It says growth has averaged 11.3% over the past 20 years, and attributes this to “a competitive institutional model and the dominance of DC”. Notably, Australia’s pension fund
landscape has the highest equity allocation at 53%, nearly double the UK’s 29%. Australia and the US also have a significantly higher DC weighting than other major economies. So, would regulatory changes make
UK pension funds turn away from bonds – and should they? The UK government’s recent
consultation about investment in illiquid assets seems to indicate this, urging that
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THE REVIEW MARCH 2023
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