Policymakers calling for greater defined contribution (DC) pension fund investment in private markets should not assume this would automatically result in higher risk-adjusted returns for savers, according to the CFA Institute.
In a new report, it said there was a “plausible argument” for increasing DC scheme investments in private markets, but it was “not as clear-cut as implied by some advocates of this policy,” with several issues needing to be addressed.
Sviatoslav Rosov, director, capital markets policy EMEA for CFA Institute and lead author of the report, told IPE that one of the association’s key messages was “proceed with caution”.
“The private market outperformance narrative has a lot of nuance to it,” he told IPE. “It’s not really helpful or accurate to just say over a long time period they have outperformed because it’s unclear whether or not that is a realisable return.
“Just because you can measure the return doesn’t mean you could have invested in that product.”
One of the issues identified in the CFA Institute’s report is how value-for-money is measured, with the association arguing that policymakers’ focus on low cost as the key metric may have to change in favour of a “more holistic” approach.
“A renewed focus on professionalism and ethical behaviour also will be needed if investor money is being allocated to these relatively opaque markets,” the report added.
On the subject of value-for-money, the CFA Institute said that charge caps, for example, would need to account for the higher expenses involved in structurally complex private market strategies.
In the UK, charges on DC schemes’ default funds are capped at 75 basis points, and the implications of this for private market investments has been a topic of discussion for some time.
Last week the pensions minister indicated a consultation would be coming up on regulations allowing schemes to pay performance fees without diluting the charge cap.
According to the CFA Institute, other issues that need to be addressed when expanding DC scheme investments into private markets include disclosure by private market companies and funds themselves and the issue of access, which was important even for large DC schemes because of the restricted nature of many private market funds.
The association also said complexity, investing culture, and valuation and liquidity terms were significant barriers that needed to be overcome in the context of DC scheme investing in private markets.
Private market investments “will challenge the daily liquidity paradigm that exists in the DC industry,” it said, adding that this “may be overdue”.
The report can be found here.