A report from the Pensions and Lifetime Savings Association (PLSA) has shown that financial return is not the only benefit from investing in illiquid assets.

The PLSA published a report with case studies from 10 public and private sector schemes including Local Government Pension Scheme (LGPS), defined benefit (DB), defined contribution (DC) and DC master trusts, with the aim to provide information for pension managers, trustees and policymakers on how pension schemes invest in this asset category and the issues to be considered when making these commitments.

Pension schemes featured in the report said that including illiquid assets in their investment portfolios brought a number of benefits including diversification, inflation protection, better returns in private credit through removing intermediaries and the opportunity to invest locally.

The report stated that these benefits are balanced against specific risks associated with investing in less liquid assets, including assets being more difficult to divest than expected, the need for different governance arrangements, uncertainty of cashflows, heightened geopolitical and regulatory risk, higher than expected correlation to traditional asset classes in times of stress, and cost.

The report also showed that through their illiquid and private markets investments, pension schemes have provided funding to a range of projects which have brought societal benefits to the local communities.

These include debt finance for a help-to-own scheme for local residents in the West Midlands by the West Midlands Pension Fund, clean energy projects in Wales by the Clwyd Pension Fund and the development of a 600-acre “Smart Campus” site in Somerset by the Merseyside Pension Fund, which was subsequently selected by Tata Group for the location of its £4bn electric car battery gigafactory.

nigel peaple

Nigel Peaple at PLSA

Encouraging investment in UK growth

In October the association recommended six policy interventions to encourage greater investment in growth assets in the UK, including illiquids.

These include raising minimum workplace pension contributions, empowering organisations like the British Business Bank to bring forward a pipeline of suitable investment assets at low cost and providing fiscal incentives to increase the attractiveness of UK assets.

Other measures call for regulatory changes to allow open DB schemes more flexibility to pursue higher investment returns, and reforms to ensure employers and trustees can place more focus on performance rather than only cost when they are selecting or designing a workplace pension.

Nigel Peaple, director of policy and advocacy at PLSA, said the recent debate surrounding the Mansion House reforms has not always reflected the wide range of investing already underway in illiquid assets by many pension schemes, nor the willingness of the sector to explore doing more provided such investments meet the needs of savers and scheme members.

“These case studies outline the real-world benefits savers’ pension contributions are providing at a regional and national level and also provide a blueprint to schemes that are less advanced on their journey to investing in less liquid and private assets,” he noted.

He added that over the last six months, the PLSA has highlighted to the government several ways in which it can further encourage pension fund investment in UK growth assets, proposing support for a pipeline of suitable assets, the right fiscal and regulatory regime for DB and DC saving, and increasing the level of workplace pension contributions.

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