Up to 40% of default assets could be allocated to illiquid investments by DC schemes for younger members, improving their outcomes, according to analysis from Hymans Robertson in its Illiquid Investment for DC Schemes paper published today. Maximising the potential will require supportive legislation, regulation and guidance with the development of an investment strategy anchored to improving member outcomes, warns the leading pensions and financial services consultancy.

The paper contains a number of new insights for the DC pension market, highlighting the impact that illiquid asset investing can have for members. It challenges the familiar myths about illiquid investments, not least that investing is too hard and too expensive for many schemes. Instead it identifies opportunities including infrastructure, private equity and private credit which can be used at different stages of the savings glidepath to drastically improve retirement outcomes for individual savers.

Commenting on the findings in the paper, Callum Stewart, Head of DC Investment, at Hymans Robertson, says:

“A commonly held belief that investing in the illiquid market is too complex and expensive could, however, be leading to caution and limiting the chance to improve outcomes for DC savers. Instead, more should be done to recognise the opportunities that investing in illiquid assets can bring to DC schemes, with further evolution of the Master Trust authorisation rules requiring all Master Trusts to accept incoming transfers of illiquid assets needed to mitigate potential bulk transfer risks.

“Despite a somewhat negative perception around illiquid investments, the findings in our paper indicate that the highest conviction schemes could take full advantage and allocate up to 40% of default assets in illiquid investments in the earlier stages of the savings phase. We would expect the norm for the majority of schemes to be around 20% and are already seeing examples of Master Trusts with allocations close to this level.

“For Master Trusts we would recommend that schemes should be required to accept incoming transfers of illiquid investments in order to maintain their authorisation. This option would remove some of the most extreme risks around liquidity, yet in tandem should increase comfort levels from schemes to invest in illiquid investments bolstering perception in the market. Specific opportunities are arising as we transition to a lower carbon and a socially just world. We therefore have a unique opportunity to not just improve retirement outcomes, but improve engagement levels using illiquid investments.

“Schemes have a collective, and moral, duty to work with their members, and to allocate members’ future contributions in ways that can improve their long-term outcomes net of costs and charges. Our research indicates there is a strong and positive case for investment, with a vast scope of opportunities available. By excluding illiquid investments from the conversations, schemes could miss the opportunities to improve outcomes for members and to improve diversification. We would urge the DC sector to revaluate their perceptions and challenge pre-existing beliefs for the benefit of members. We also need policy makers and the Pensions Regulator to work harder to break the link between investment strategy development and absolute levels of costs and charges which doesn’t automatically translate to better outcomes for the member.”

The paper can be accessed here.