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Changing the system

18 Oct 2021

Louise Farrand is the executive director of the DC Investment Forum

What’s stopping pension schemes from accessing private markets and how can we change the system?

Over the past few years, the number of defined contribution (DC) savers – and the money invested in DC schemes – has grown exponentially. The industry’s focus has turned to investment strategies. What works? What systemic barriers still exist?

Accessing private markets is one of the thorniest areas within DC investment right now. The same barriers to entry are repeated: some pension schemes are not convinced of the investment case for private markets and asset managers have struggled to make them accessible at low cost. Platforms daily dealing requirements have further hindered access. And regulation makes it too difficult.

The good news is that some of these barriers are collapsing as we become more sophisticated DC investors. Let’s take each of them in turn.

Private markets

Private markets are a broad church. Within that broad church, there are clear opportunities for DC schemes. The DC Investment Forum (DCIF) believes schemes should be given access to the full range of investment opportunities, so that they can construct diversified portfolios.

To take a couple of interesting trends: the private equity universe is growing because successful companies are remaining privately owned for much longer than they once did. In the past, the IPO was the hallmark that a company had made it.

Now, big businesses are often born out of intellectual capital, instead of manufacturing might. They do not always need enormous capital injections to grow.

Real estate is another area DC schemes may want to look at. Only 30% of DC schemes invested in property in 2018, according to the Investment Property Forum (IPF). Although the IPF expected this to grow to 40% by 2028, this still leaves 60% of DC schemes missing out on the opportunities for a steady stream of income which property can provide.

Private markets are expensive

Many investment managers think creatively about how to make private markets more accessible to DC schemes, such as using investment trusts. Master trusts operate in a competitive environment. However, there could be compromises. With most master trusts operating significantly below the current charge cap, it is time we questioned the ‘cheapest is best’ narrative. If an asset class delivers bang for its buck, it could be worth paying a slightly higher price to gain access.

Platforms’ daily dealing requirements have further hindered access

The lack of private market funds on platforms is a barrier for many DC schemes. Schemes should keep raising this issue so that it is clear there is demand.

A DCIF commissioned Pensions Policy Institute (PPI) paper concluded: “Daily dealing is a challenge, but it should not prevent investment and that daily pricing is the real issue. Prices have to be shown to members and there is a need to have liquidity structures in place to meet redemption and transfer requests. The real myth is that daily dealing is required. “[Platforms should] find a solution to daily pricing – they could use monthly pricing and put that in every day as the price – or come up with some other pragmatic option.”

Regulation

We know that government and regulators are keen to ensure that DC schemes can access private markets. While staying within the charge cap adds complexity, it is certainly not insurmountable.

One of the PPI’s interviewees said: “The charge cap is something you have to consider but it is not a barrier – it is not stopping investment innovation.”

Looking ahead

The real problem with accessing private markets has always been one of agency. With so many barriers in place, it can be easy to think that if one is lifted, others will remain in place, obstructing the path to greater investment in private markets. Only by working together as an industry will we collectively clear the path, helping DC members bene t from a diversified range of investments.

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