Pension trustees must now state their policy on investing in illiquid assets

Pension trustees will now have to state their policy on investing in illiquid assets.

From Sunday trustees must make the declaration in the statement of investment principles for their scheme’s default arrangements.

Illiquid assets are those that cannot easily or quickly be sold or exchanged for cash and include any such assets held in a collective investment scheme.

The changes are a part of the ‘Focus on Value’ guidance for defined contribution (DC) pension investments, as outlined in August.

Tim Orton, chief investment officer at Aegon UK welcomed the new regulations.

He said: "They will encourage DC pension trustees to consider a wider range of investments. This is in line with the growing understanding in the industry that pension funds should focus on value rather than cost. It also creates opportunities for new solutions, such as illiquid assets, to be held as part of a globally diversified portfolio.

“When used effectively, illiquid assets have the potential to improve retirement outcomes for the millions of people who save into DC pension schemes in the UK. However, as with any investment decision, trustees will need to be sure that the potential benefits outweigh the risks, and that any allocation is in the best interests of members.”

Performance fees

Trustees will also be required to disclose the asset class breakdown for each of their scheme’s default arrangements in the chair’s statement.

The new regulations have also removed a regulatory barrier that may have hindered trustees from exploring investment in certain funds that came with performance fees.

Mansion House reforms

Since April, trustees have had the option to exclude specified performance-based fees from the list of charges falling within the regulatory charge cap limit of 0.75 per cent per annum.

To ensure transparency, schemes must disclose in their chair’s statement any performance-based fees incurred in relation to each of their default arrangements, calculated as a percentage of the average value of the assets held in those defaults.

Also, trustees must robustly assess the extent to which these fees represent good value for their savers alongside other costs and charges.

Widening the investment remit of pension funds

The Chancellor of the Exchequer Jeremy Hunt launched the 'Mansion House Reforms' in July, one of which included plans to unlock the collective potential of UK pension schemes to invest in the UK economy and boost returns for savers.

The Chancellor has outlined reforms that he claimed could unlock an additional £75bn for high growth businesses, while reforms to defined contribution pension schemes will increase a typical earner’s pension pot by 12 per cent over the course of a career.

Hunt said the "comprehensive reforms will increase pension pots by as much as £16,000".

He claimed the reforms which included plans to encourage more investment in productive finance and unlisted companies, would tap into up to £75bn of additional investment from defined contribution and local government pensions.

Mr Hunt said the United Kingdom has the largest pension market in Europe, worth over £2.5 trillion, which has grown during the ten years since the introduction of automatic enrolment, with £115bn saved in 2021.

Read more: Productive finance: Pension panacea or sticking plaster for UK plc