Pension investment reform focuses on illiquid assets – Birmingham Post article 22.07.2021

Moves are afoot to make it easier for Defined Contribution (DC) pension schemes to invest in illiquid assets – those that in contrast to most stocks and shares can’t be easily sold.

They include direct property investment, investment in infrastructure projects, private equity and hedge funds.

Two of the main arguments are that it would help unlock private capital to fund the hoped-for infrastructure explosion – which the Government is determined to see come to fruition – and enable an increasing focus on sustainable investment and Environmental, Social, and Corporate Governance (ESG) in sectors such as social housing and wind farms.

Currently, unlike their Defined Benefit (final salary) counterparts, out of favour with most employers, there are significant obstacles to DC schemes investing in illiquid assets. Lack of a centralised market can make it hard to find buyers.

The Financial Conduct Authority has issued reform proposals for investing in long term assets, and recently completed a public consultation on the issue.

Similarly, the Institute and Faculty of Actuaries (IFoA) is also behind change despite admitting that trading an illiquid asset can be “relatively challenging”.

However, both are treading cautiously, perhaps because illiquid assets have been mired in controversy, if to some extent unfairly.

The Neil Woodford scandal remains fresh in people’s minds whereby his £3.7 billion Woodford Equity Income fund, once popular with hundreds of thousands of investors looking to build long-term wealth, collapsed, partly because it had 40 per cent of its assets in illiquid investments. Investors, 400,000 of them, lost more than £1 billion.

And, turning to issues with the property sector, the IFoA has cautioned: “The challenges of funds offering more focussed illiquid investments for DC members were illustrated during 2016 when, following the EU referendum result, a number of property funds experienced deferred redemptions or, alternatively, materially reduced sale prices of up to 10 per cent. British property was among the sectors hardest hit by the vote in favour of Brexit and, at one point, commercial property funds worth over £18 billion were suspended.”

In addition, investing in illiquids requires significant research and potentially complex operational structures, which can create a high governance burden for pension schemes.

Nevertheless, there is a confidence these hurdles can be overcome.

There are potential benefits to the schemes’ long-term growth potential, with claims that DC pots could be boosted by around 10 per cent if some illiquid assets were added into the mix early on.

In theory, this shouldn’t be a problem when pension schemes may be held for decades and can’t be cashed in until the holder is aged 55 at the earliest.

Maria Nazarova-Doyle, head of pension investments at Scottish Widows, told CityWire: “Investment in illiquid assets has been held back by regulations and prevailing market practice that prevents DC pensions schemes from directly investing in such assets. Savers are missing out on potential returns of tens of thousands of pounds.

“But times are changing. Asset managers and the Government are waking up to the boost illiquid investments can offer to savers in DC schemes and to the UK’s economy.”

The IFoA noted: “The case for illiquid investment for DC schemes is strong. It is imperative that regulators and policymakers support and promote change.”

Yet, speaking to Investment & Pensions Europe, Philip Smith, of TPT Retirement Solutions, appeared sceptical for an early breakthrough. “The illiquid dream for DC schemes in the UK is far from realised and will remain that way until there is a fundamental shift in the make-up of the industry’s infrastructure and regulation that underpins it.”

Encouraging though that the will to break down barriers seems to exist.