The Association of Investment Companies (AIC) has welcomed the Department of Work & Pensions paper, ‘Facilitating investment in illiquid assets’. The paper takes forward proposals to exclude well-designed performance fees from the pension charge cap applied to default funds of pension schemes. It also opens a consultation on increased obligations for defined contribution (DC) pension schemes to explain their strategies regarding illiquid investments.
Richard Stone, Chief Executive of the Association of Investment Companies (AIC), said: “We welcome these proposals which aim to encourage pension funds to invest in a wider range of assets. A greater allocation to less liquid assets could provide savers with diversification and better long-term returns, as well as encouraging more investment in productive areas of the economy including green infrastructure, emerging technology and private companies.
“However, it is also clear that pension fund trustees have concerns and the asset management sector needs to do more to address these. All fees, including performance fees, need to be well-designed to be fair to investors. It’s understandable that pension funds want safeguards to protect scheme members.
“Investment companies are a tried and tested way of accessing illiquid assets, with 41% of the industry’s assets in alternatives such as infrastructure and private equity. These sectors have performed well, with Infrastructure returning 191% and Private Equity generating a return of 535% over the past ten years.
“The permanent capital structure of investment companies makes them particularly suitable for capturing the illiquidity premium offered by alternative assets. Investment companies’ professional fund managers can take a long-term view of their portfolio and do not face the risk of becoming forced sellers because of redemptions – avoiding the risks of liquidity mismatches. At the same time, investment companies’ stock exchange listing allows investors to trade easily. Investment companies also have independent boards of directors to negotiate costs, hold the manager to account and provide an additional level of governance to protect shareholders’ interests.
“For pension funds looking for exposure to alternatives, investment companies can provide part of the solution. They offer strong performance, robust governance, active oversight of fees and the ability to trade on the stock exchange, making them the natural choice for less liquid assets.”
The benefits of holding illiquid assets for a wide range of pension savers, including those with smaller amounts invested, were recently explored in research undertaken by the Pensions Policy Institute and sponsored by the AIC.
