The Government wants workplace pensions that operate with a defined contribution to inject up to 20% illiquid assets into their default funds to boost savings and reflate the economy.
At the same time it is threatening the majority of extant DC schemes with the chop as they face the twin threats of the VFM Framework with Red on the RAG rating, spelling closure and ongoing pressure to consolidate, consolidate, consolidate – typically into mult-employer schemes.
As we know from talking to DB pension schemes, the last thing that Trustees do when faced with a liquidation event, is embrace illiquid investment strategies. It is only those schemes which see a realistic prospect of growth, first to £20bn and ultimately to £50bn + that can sleep relatively easily.
“Relatively” is the operative word. Any DC pension is aware of the limited tenure of its member’s assets. Members transfer away , die and if they don’t die, they live long enough to transfer funds into a SIPP or annuity to drawdown the pot. These “claims” are significant and mean that unless there are new cashflows replenishing money’s claimed, units will need to be redeemed.
Redeeming units in a pooled fund is normally easy enough but where the fund sold is an LTAF or similar, there may be issues around gating
| Redeeming units in a pooled fund is normally easy enough but where the fund sold is an LTAF or similar, there may be issues around gating. Gating is the practice of allowing a unit to be sold when the gate is open – the gate is controlled by the fund manager and being “shut in” is rarely a good thing for savers who want their money. | |
| Many of these claims are common to all pension schemes but what is unique to DC – or at least the way that DC is today, is that to establish a retirement income , whether from an insurer , a SIPP or bank account, you must encash your units. | |
| So long as retirement involves a claim , then the capacity of DC schemes to manage liquidity is impaired. What is needed , is what DB plans have, a seamless experience from saving to spending with members being paid from the same fund as they save into. | |
| In the rarefied world of CDC , this is known at the “whole of life” pension , where the pension may accommodate members from young adulthood till when death do them part. | |
| So long as the fund and the liabilities are in equilibrium, this model allows for a high level of illiquidity. Whether illiquids are liquidatable at a certain point does not matter, so long as the fund as a whole has liquidity to meet short-term claims | |
| This is the model that DC should strive towards, I feel it is achievable and when it is, the prospect of DC holding illiquids as long-term assets improves. | |
| Right now the prospects for most DC schemes are too uncertain for them to make a wholesale move into illiquids and the Government should consider adopting a new model. |
Quite so. For a pension scheme to be capable of fulfilling the government’s productive investment agenda, it needs to be open to new members and collectively invested (whether DB or CDC). Closed DB and and individual DC pots are unsuited.
We also have a near complete absence of pensions (not pots) in the private sector.
Come on Treasury, join the dots on your agenda, and issue the multi-employer CDC regulations consultation which is sitting ready to go in the DWP.
Let’s get to work on providing pensions again in the private sector.
Cannot agree more with you and Derek.
The fundamental problem with pension scheme investment is the duration of the individual pension product and the resulting forced liquidation of investments; whether this be in a DB scheme targeting buy-out or transition to a Low Dependency Investment Allocation or in a DC product on change of employer, switch from accumulation to decumulation, or on so called lifestyle change trigger points.
What we do need is for the individual to obtain the maximum value from their pension scheme by allowing continuity of investment across all these events.
Multi-employer whole life CDC helps addresses these issues and minimises administration and transaction costs borne by the individual if it remains available across the whole pension time horizon.
As a separate point:
We also urgently need regulatory consistency across all the various pension products, including DB Pensions, Mastertrusts, contract DB accumulation and decumulation products including annuities, if the benefit of investing in illiquid assets and private equity is to be encouraged.
You might also like to consider Hymans Robertson’s Paper: Intergenerational risk
sharing: it’s dynamite!
https://www.hymans.co.uk/media/uploads/Intergenerational_risk_sharing_-_its_dynamite.pdf