The majority of UK master trusts providers intending to incorporate illiquids assets into their portfolios are planning to do so by adopting a dual default strategy, according to Isio’s findings.

Providers surveyed by Isio said they plan to offer both “premium” and “low cost” defaults. The consultancy said that with circa £100bn of assets between these providers, this direction of travel highlights cost is still an integral consideration in default design.

Only a small number of providers told Isio they would opt for a single default strategy that includes illiquid assets. Overall, 12 master trusts told Isio they were planning on incorporating illiquids into their default investment strategies.

Back in July 2023, nine master trusts including Aviva, Scottish Widows, Legal & General, Aegon, Phoenix, NEST, Smart Pension, M&G and Mercer committed to allocating at least 5% of their default funds to unlisted equities by 2030 as part of the Mansion House agenda. Since then, Aegon and Cushon joined the signatories list of the Mansion House Compact.

Research by Isio found that 10 of the master trusts it spoke to plan to allocate illiquid assets throughout their entire lifespan, with two focusing solely on their earlier growth phase.

Planned allocations to illiquid assets within the overall default structure vary significantly, with four providers estimating they would hold as little as 0-5% during the growth phase, while two foresaw allocating up to 16-20% at this stage.

Isio’s research found that allocation size is heavily influenced by whether a provider is targeting one or two defaults.

It added that providers are predominantly building diversified portfolios of illiquid assets, with private equity being the most popular choice, while real assets – particularly property and infrastructure – will also see large allocations.

The research also showed that all providers are utilising a mix of internal and external managers to handle their illiquid allocations.

There is interest in a variety of investment vehicles beyond Long Term Asset Funds (LTAFs), which include blending co-investment or direct investment within the LTAF structure.

Seven providers said they aimed to begin implementing these changes within the next 12 months, with three providers aiming for the following 12 months. Of the remaining providers, one has already confirmed implementation and one has yet to confirm its plans.

Isio said this movement marks a significant evolution in the UK DC master trust market, promising enhanced investment strategies and diversified portfolios.

George Fowler, partner at Isio, said: “DC master trusts are clearly going to be big investors in illiquid assets in the years ahead, and they will form an increasingly important allocation within their default investment strategies.

“This approach promises to enhance portfolio diversification and potentially deliver better long-term outcomes for members, and we expect schemes to prioritise increasing these allocations in the growth phase.”

He added that the next 12-24 months will be “crucial” as providers implement these changes.

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