Regulators and industry leaders need to act courageously to enable defined contribution (DC) pension members to access the same potential benefits offered by private markets as those in defined benefit (DB) schemes, according to a panel of experts.
Speaking at the Pension and Lifetime Savings Association’s (PLSA) virtual investment conference on 9 March, a five-strong panel addressed current issues around “Including private markets within a DC default”, and how they might be solved.
With uncertainty about the long-term performance of traditional bond and equity portfolios, the panellists said savers in DC schemes needed other options, just like those being implemented for their peers in DB schemes.
Laura Myers, head of DC at consultant LCP and member of the PLSA’s policy board, said: “You wouldn’t actually have this session for a DB scheme. It’s an accepted fact DB schemes invest in illiquid assets.”
The panel noted that DC members – especially those in default funds – were often left with less than optimum choices for their long-term investment plans, which put them at a disadvantage to those in DB schemes.
“It’s essential that DC members have access to the same tools that DB pensions have,” said Myers. “[DC members] are shouldering these investment risks, so we shouldn’t be limiting the universe, we should be pursuing these opportunities… for getting stronger returns from things like private equity and infrastructure.”
The panel noted that private assets had become increasingly commonplace in several international jurisdictions including Australia, which boasts a relatively mature DC system.
Roberto Cagnati, head of portfolio and mandate solutions at private markets specialist Partners Group, said private equity allocations, in a very traditional form, made up 10% of portfolios in the Australian DC markets, with infrastructure making up a similar allocation.
“You can increase your monthly and retirement income by 10-20%, depending on what type of mix you add to your traditional portfolio,” Cagnati said.
The panel agreed that major operational barriers, such as demands on funds to provide daily liquidity and the imposition of charge caps, made default fund allocations difficult.
However, as other nations had navigated them successfully, there was precedent for change that could see DC investors offered the same opportunities as DB members.
“If the industry and the regulators, in particular, were brave enough to renegotiate the social contract we have with pension investors, we could really take away this misalignment,” said Maria Nazarova-Doyle, head of pension investments at Scottish Widows, “or at least mitigate it and make it less risky for businesses to offer these products, leading to a much healthier market and illiquids for DC.”
The UK’s NEST is so far the only major DC scheme to have made a significant investment into private markets, allocating approximately 5% of its default fund to strategies run by Amundi and BlackRock in late 2019.
In a speech today the pensions minister said the charge cap would be maintained, but that the government was responding to requests for schemes to be able to invest more in illiquid assets.