DC schemes and trustees consider diversifying their portfolios and exploring a range of assets “to reduce burdens on trustees and open up private markets further”. Christine Hallett, MD at independent
pensions services provider Options UK, believes there’s little appetite in the UK for divergence into higher-risk investments because, she says, regulators have stifled opportunity. “Some individuals who have the appetite and propensity to take more risk are deemed to be incapable of determining this themselves,” she adds. “Even if investment regulations were relaxed, unless there is a change in approach from the regulators, pension professionals would still not embrace the change for fear of comeback.” The law changes may not quite bring a
free-for-all. But Daniela Silcock, head of policy research at the UK’s Pensions Policy Institute, believes regulation change can help Britain play catchup. She points to Australia as a positive example but notes that charges are much higher there, predicting that the UK will invest more in diverse portfolios while keeping charges low, “therefore moving ahead”.
Global lessons Diversification at scale within a single fund Even with new freedoms, the UK may only match the power of, say, Australian funds if they define and approach diversification in the same way. “There’s a tolerance to multiple accounts in the UK that we in Australia find hard to understand,” says Dr Martin Fahy, CEO of the Association of Superannuation Funds of Australia (ASFA). “Diversification comes at scale within a fund, not through individuals having a proliferation of tiny amounts in pots.” The Australian DC market is based on
what Martin describes as the three pillars of compulsion, universality, and preservation. And the asset allocation of the country’s pension funds (see table, p.38) is part of a system more liquid than many people assume, says Martin. One characteristic he highlights is the
allocation to alternatives, particularly long-term infrastructure around the world, such as roads and airports, energy, and digital. These are all government- awarded utilities or monopoly assets but with built-in consumer price index
CISI.ORG/REVIEW
increases over 40 years, aligning with the liability that the DC market has built across the system, he says. Martin explains that this approach
allows funds to capture an illiquidity premium in the asset in a low inflation environment. It also generates significant cash inflows, and investors benefit from exposure to long-term assets that they would find difficult to get through listed markets. Similar to the Australian model, the
New Zealand pension landscape is largely dominated by multi-asset funds, although, says Mark Hattersley CFP™ Chartered FCSI (Financial Planning), a financial planner based in Wellington, there are a small number of ‘self-select’ KiwiSaver and superannuation schemes that share some commonality to self- invested personal pensions. “These are used by advisers as a
conduit to meet their own asset allocation framework and fund selection and offer access to direct equities, investment trusts, active and passive pooled funds, all with a ‘mainstream feel’ to them rather than esoteric solutions,” he says.
Venture capital funds If the UK were to allow its pension funds to invest in venture capital (VC) funds, that would help to level the global playing field. VC, however, is a particularly illiquid asset class, so DC funds must factor in the risk of a flood of redemptions. Then there’s the cost – the illiquidity premium – and the current 0.75% charge cap currently prevents making VC a worthwhile risk. For all the potential return of a freer
investment landscape, the risks have also been underlined recently. In June 2022, a historically high-returning Australia suffered a A$116bn stock market crash, driven by fears of recession, giving superannuation funds their biggest hit since the 2008 financial crisis.
Asset allocation and growth One surprising legacy of the rule changes may be how quickly public pension plans embrace the new freedoms – certainly if trends follow the US, where riskier assets constitute a larger percentage of American public pension funds than private plans, according to a report from January 2019, Impact of public sector assumed returns on investment choices, by the Boston College Center for Retirement Research. It shows
// THE LAW CHANGES MAY NOT QUITE BRING A FREE-FOR-ALL //
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