Global instability fuels DC pension saver demand for illiquids investments
So, what lies behind the enthusiasm, especially when it comes to investing in infrastructure that supports sustainable supplies of food and energy, affordable housing, and local job creation? And how does this feed into the great debate on illiquids in defined contribution (DC) pensions?
In July 2023, nine leading UK pension providers, including Legal & General, signed up to the UK Government’s Mansion House Compact, committing themselves to allocating 5% of assets in their default pension funds to unlisted equities (illiquids), which broadly speaking are assets that can't quickly and easily be sold or exchanged for cash, by 2030.
The Compact marked a rise in the temperature of the debate on illiquids in DC that has been simmering away in the UK and Europe for a few years now.
The argument in favour of illiquids is that these types of investments could unlock more money for DC pension funds while investing in the country’s overall economic growth.
However, there is also a general acceptance that there will need to be additional safeguards introduced to minimise risks and seek to achieve best value for savers.
Yet even as the pensions industry and its regulators hammer out the details of introducing and/or increasing investments in private markets into DC funds, LGIM’s latest look at its DC pension members’ views on environment, social and governance (ESG) issues found that these type of investments appear to be rather popular. And that’s whether or not DC savers have even heard of illiquids.
In fact, so keen on illiquids are LG’s DC members that most of the 3,634 interviewed in the UK would be prepared to pay higher pension fees to have them. And that is at a time of rising prices and just months after the Office for National Statistics estimated that consumer price inflation was the highest in more than 40 years.
Almost three-quarters (72%) of LG’s surveyed UK DC members said they’d pay higher fees to invest in infrastructure that supported renewable energy sources, such as solar parks and wind farms.
Taking a long-term view
It’s likely to be the cost-of-living crisis and rising prices that lies behind DC members’ resignation to increase their outgoings to invest in projects that might help make the UK less dependent on global factors affecting economic stability.
In every case of illiquid infrastructure investments that LG asked about in its survey, over half of respondents said they’d pay higher fees to have their pensions invested in this way, but only if there was no impact on their fund’s performance.
The cost-of-living crisis has taken its toll on savers. Nine in 10 of those interviewed described themselves as having less disposable income.
With 90% feeling a financial squeeze, the research appears to suggest that among DC pension savers at least, rising prices have made them think harder about their, and the wider UK’s, long-term economic resilience.
Whatever the reasons, the sense of vulnerability to the vagaries of the global economy appears to drip through our research results, watering the ground for illiquids in DC.
LGIM performed quantitative research using a questionnaire for 4,678 defined contribution workplace pension savers. The survey was completed in June 2023.
Respondents were split across generations and genders and across the UK and Ireland.
This article refers to UK figures for DC members in the accumulation phase. A separate report is available for our research into the ESG views of Irish DC scheme members.
Key Risk Warnings
The value of investments and the income from them can go down as well as up and you may not get back the amount invested. Past performance is not a guide to future performance. The details contained here are for information purposes only and do not constitute investment advice or a recommendation or offer to buy or sell any security. The information above is provided on a general basis and does not take into account any individual investor’s circumstances. Any views expressed are those of LGIM as at the date of publication. Not for distribution to any person resident in any jurisdiction where such distribution would be contrary to local law or regulation. Please refer to the fund offering documents which can be found at https://fundcentres.lgim.com/
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