Adviser Points of View (06/03/2019) – JLT Employee Benefits has argued that an allocation to professionally managed illiquid assets could increase defined contribution (DC) pensions by 10 per cent at retirement.
The firm suggested a 20 per cent exposure to illiquid assets such as private equity, infrastructure or real estate, could enhance diversification and generate additional return.
Maria Nazarova-Doyle, head of DC investment consulting at JLT Employee Benefits, said: “The focus on daily-dealt funds with near 100 per cent liquidity is a fundamentally impatient approach to DC. Many default strategies are currently failing to adequately diversify investments, precluding savers from the valuable illiquidity premium that can be accessed through alternatives.
However, the firm also stated that manager selection remained critical because of the large dispersion of returns within the alternatives space, as well as liquid alternatives being hard to value in certain market conditions.
This comes as analysis by JLT Employee Benefits found those in DC default funds have a much lower need for liquidity as a result of the long-time horizons to retirement.
However, Alan Chan, director at IFS Wealth & Pensions, said: “I think it is a risky step because clearly the illiquidity risk is an issue. On the face of it, it seems a bit bonkers to suggest an exposure as high as 20% of your portfolio in my humble opinion. I think it’s possible to provide some diversification benefit to a certain extent for a small part of the portfolio for someone with a large enough pension pot but it’s difficult to say without further details. For now, I’d be more inclined to stick to liquid assets.”
This comes after the Department for Work and Pensions issued a consultation on how to direct some of the £60bn held in DC pension schemes into alternative illiquid investments to boost the UK economy.
Full article link: https://www.adviserpointsofview.com/2019/03/alternative-assets-could-boost-pensions/
