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Regulatory rule change could trigger illiquid investment rush


Defined contribution pension schemes are preparing to increase their allocations to illiquid investments ahead of a highly-anticipated regulatory announcement due in the second quarter of 2019.

The Financial Conduct Authority is planning to relax rules that currently restrict the amount of returns that pension schemes can generate from illiquid assets. It follows a separate Department for Work and Pensions’ consultation on illiquid assets and the development of scale in DC schemes.

The DWP report noted that “by investing almost wholly in highly liquid investments such as publicly-listed equity and debt, beneficiaries can miss out on the illiquidity premium which results from being invested for the long-term.”

Given this recognition that illiquids are indeed suitable for DC pension schemes, fund groups are anticipating inflows into real estate, private debt, infrastructure and venture capital strategies, as pension trustees respond to the changing regulatory guidance.

“Illiquid assets are definitely something that trustees are looking at,” Jayna Bhullar, an investment consultant at Quantum Advisory, told Research in Finance.

“Pension schemes are in a really good place because they have a long-term time horizon, which means they can ride out difficult markets.”

According to Research in Finance’s 2018 UK Institutional Market Study, 45% of consultants predict that pension funds will increase their allocations to infrastructure assets in 2019, while 43% said pension funds would increase allocations to direct lending. One in five were expected an increase in allocations to property.

Quantum’s Bhullar agrees that these illiquid asset classes look appealing, particularly for defined contribution pension schemes, but stresses that smaller schemes are likely to require some assistance prior to making their initial allocations.

“It is about trustee knowledge and understanding,” she explains. “It is important that members understand the investments.

“Some strategies are able to put up gates in the event of extreme liquidity events, so there may be instances where they are unable to access their capital as quickly.”

Bhullar’s concerns were echoed in a recent Pensions Policy Institute paper which stressed that an “information gap” exists for schemes that remain unaware of the benefits of investing in illiquid strategies.

For asset managers, there could also be another hurdle. Smaller DC schemes often use platforms that refuse to accept funds that don’t offer daily dealing as their systems are designed to update with daily pricing. To navigate these challenges, trustees may opt to employ a fiduciary manager.

Despite these considerations, Bhullar explains that there are a wide variety of fund providers in the market for those keen to get exposure.

Macquarie, IFM and Partners Group were among those to poll well in the Research in Finance’s 2018 UK Institutional Market Study when it came to infrastructure debt strategies, while Partners Group, BlackRock and Blackstone were commonly recognised for their private equity strategies.

“We predominantly use Partners Group, but there are several other good managers. BlackRock are quite prevalent in this market.”

* Those seeking to learn more about institutional investment attitudes towards illiquid asset allocations, with views from pension schemes, trustees and consultants, can find out more in the 86-page study, available here.

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