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UK to give DC pensions greater access to illiquid assets

Government warned it will receive industry ‘backlash’ over the ‘controversial plans’


The Department for Work and Pensions (DWP) has published a consultation looking to “help pension savers benefit from more diversified investment portfolios”.

This would be achieved by making it easier for defined contribution (DC) pension schemes to invest in illiquid assets, including private equity.

Members would need to receive disclosures and explanations on illiquid investments, and bigger schemes would need to disclose their asset allocation to clients.

The consultation also builds on previous proposals to amend the charge cap – currently set at 0.75% – and exempt performance fees from such a limit to broaden pension schemes’ investment strategies.

Pensions minister Guy Opperman said: “I am passionate about ensuring pension schemes have the necessary information, and a broad range of options, to deliver the best possible outcomes for the record number of Brits now saving for retirement.

“Opening up greater illiquid asset options to DC scheme investment will help do just this and enable schemes – and savers – to benefit from more diversified portfolios, while also bolstering the role pension investments can play on our journey to a carbon-free economy.”

Product provider Phoenix Group recently called on the government to loosen the charge cap for pensions to give savers, especially the young, the option to invest in higher risk products.

Higher costs?

But the move did not receive as warm a welcome as Opperman may have expected.

Tom Selby, head of retirement policy at AJ Bell, said the government should expect “backlash from various corners of the pension industry over controversial plans to water down the automatic enrolment charge cap”.

“These concerns are entirely justified – any move to exempt performance-based fees from the charge cap risks leaving members’ exposed to higher costs,” he said. “Of course, cost is just part of the value-for-money equation, and the key is whether these investments can justify the associated extra fees. Policymakers clearly firmly believe illiquid investments can deliver better overall returns for members than more mainstream asset classes.

“While there is some evidence to suggest this could be the case, there are no guarantees and many trustees will understandably be wary.

“Ultimately, trustees have a fiduciary duty to invest members’ hard-earned funds in a way that is most likely to deliver the biggest retirement pot possible. Just because the government wants pension schemes to help the UK ‘Build Back Better’ doesn’t mean those schemes will play ball.

“Whether or not performance fees are eventually excluded from the charge cap, trustees will still need to satisfy themselves these investments are appropriate for largely disengaged members who end up in their auto-enrolment ‘default’ fund.”

No hurry

Kate Smith, head of pensions at Aegon, said the silver lining with the proposal is that the government recognised such measures “should not be rushed”.

“We’re pleased that there will be further consultation ahead of any steps to remove performance fees from the auto-enrolment default fund charge cap,” she added. “We believe the proposals to require trustees to disclose their stance on investing in illiquid asset classes will need further thought. We welcome the DWP seeking to avoid making this a costly exercise.

“The key issue is who will truly find the new disclosures helpful and if they actually will change trustee investment behaviour. Ultimately, a key issue is that members of DC schemes now expect daily pricing and the ability to switch funds, transfer between schemes or access their benefits flexibly from age 55. These remain the main barriers to greater investment in illiquids.”

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