DC daily pricing blocking illiquid investments

Daily pricing is used in DC to allow investors to transfer in and out of funds at will using up-to-date valuations for those assets.  

But it is not a regulatory requirement and excludes scheme members from asset classes and strategies that could deliver better outcomes, concluded the Defined Contribution Investment Forum, which is made up of seven asset managers.

“[The approach is] denying savers greater diversification. There are no regulations anywhere that make this a requirement,” said DCIF chair Andy Dickson, who is also UK institutional investment director at Standard Life Investments.  

The forum’s white paper published today, Mind the Gap, challenges this approach and calls for external bodies such as the National Association of Pension Funds to champion new ideas and industry collaboration on the issue.  

Henk Michels, head of investment operations at the state-sponsored National Employment Savings Trust, which is currently exploring real estate and infrastructure, said liquidity is "less of an issue" for default funds as they attract around 90 per cent of all DC members, who then tend not to switch in and out of funds. "If you want to do weekly, monthly, the regulations allow you to do so,” he added.

The view that low member engagement means people do not need daily liquidity was shared by Britt Hoffman, head of DC investment at P-Solve. "It has become accepted as common practice even though it limits investment choice to more traditional asset classes," she said, adding that moving away from daily liquidity could also result in "operational efficiencies and savings".

DC was “created to look like a savings account” and is not focused on retirement incomes, said Kevin LeGrand, head of pensions policy at Buck Consultants, at the launch of the report yesterday.

There were two ways for schemes and the industry to move away from this structure, he added: removing illiquidity restrictions and adopting a more managed fiduciary approach. On barriers to infrastructure investing for DC scheme members, he said: “We’ve got lots of money that we’d like to put into that.”

Managing director at Independent Trustee Services, Chris Martin, said some of the largest DC funds already deal weekly, which "presents certain practical problems but they are not insurmountable".

"Some delays and administrative complexity would be created within the switching and investment allocation processes, with contributions invested immediately in some funds but sitting in cash for up to a month on monthly dealt funds," he said.

"These are frustrations rather than reasons not to invest in a particular asset class, but it does mean that the bar is set higher for that asset class when trustees are reviewing the options they make available to members."

Paul Bucksey, head of DC business development and strategy at BlackRock, agreed and said it is "incongruous" that while DB schemes are exploring a broad range of real assets, DC members are constrained.

"The implications of QE are such that DC members should be able to explore less liquid parts of the market to achieve their longer-term goals,” he added.

But Malcolm Reynolds, managing director at JLT Benefit Solutions, warned there could be unintended consequences if members are not able to get up-to-date pricing and “model best outcomes”.

He said: “We are in an electronic world where members are being driven to look at their investment holdings via self-service portals – if members don’t see regular movements compared to other asset classes, will this drive natural human behaviour to change asset classes?”