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UK warned about high DC scheme costs with illiquid assets plan

Move would add ‘regulatory burden’ and deliver ‘little for members’

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Advisory firm LCP has cast doubts on the Department for Work & Pensions’ (DWP) proposals to allow defined contribution (DC) pension schemes to have greater access to illiquid investments.

In its response to the consultation, the company argued that the plans “could fail to achieve their objective”.

According to the DWP, the move would “help pension savers benefit from more diversified investment portfolios”.

But LCP said that, while the plans are “well-intentioned” they could risk increasing scheme costs without improving member outcomes.

The firm objected to three main points in the consultation:

  • Since illiquid asset holdings would need to be disclosed on a quarterly basis, the information is likely to go unnoticed by scheme members, who “rarely read” it, which in turn would not lead to higher engagement with the scheme’s investment strategy, as the consultation claims.
  • Gathering this type of data every three months would be costly, which would come to the “potential detriment of members”. Additionally, LCP argued that quarterly reporting “adds little value when DC pension schemes invest for the long term and review their allocations on an annual or triennial basis”.
  • LCP also believes that the DWP proposals “would not tackle the real barriers” that do not allow DC schemes to invest in illiquids. These include concerns about the fairness of assets priced monthly or quarterly that can be sold by members daily; the “tension” between member needs and regulation for ready access to DC funds; as well as the need to invest money in illiquid holdings for longer periods.

‘Costly and burdensome’

Laura Myers, partner and head of DC at LCP said: “The DWP’s aim to remove barriers to investment in illiquid assets is well-intentioned, but these latest proposals risk adding a regulatory burden whilst delivering little for members.

“Member engagement is unlikely to be enhanced by adding complex financial information into little-read documents, especially as these requirements only relate to the ‘default fund’ investments which apply to the least engaged scheme members.

“Requiring quarterly reporting of holdings of illiquid assets seems unnecessarily costly and burdensome, especially as many schemes may only make strategic decisions about their asset allocation on an annual or triennial basis.

“Most DC trustees would be willing to consider greater investment in illiquid assets but face barriers which will not be addressed by these latest proposals. In particular, trustees need greater guidance from government on how best to reconcile greater use of investments which involve less frequent pricing and the ability consequently for members to ‘win’ and ‘lose’.

“We also have the issue of tying up funds for long periods with the demands of members who expect access to their funds at short notice.”

As things stand, these proposals could increase scheme costs without improving member outcomes”.

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