On the go: Around 85 per cent of UK pension schemes are set to increase their allocations to illiquid assets in the next three years, according to research from Alpha Real Capital.
The analysis, which polled 100 UK pension fund professionals, showed that 7 per cent are expecting a significant rise in illiquid investments, as these assets are growing in popularity due to offering a potential to earn a premium over more liquid assets.
Greater transparency around the asset class is the main reason for 79 per cent of respondents increasing their allocations, the research found.
However, 69 per cent said increased opportunities in this area is also a factor driving investors’ interest.
Around 44 per cent of those questioned said they are increasing allocations due to a growing desire to diversify their portfolio, while 8 per cent pointed to improvements in the premium for investing in illiquid assets as the main driver.
Most investors are happy with an additional premium for investing in illiquid assets of less than 1 per cent, the research found.
Furthermore, the survey also showed that schemes already have substantial allocations to illiquids – around 58 per cent of respondents said their scheme allocates up to 25 per cent to these assets as part of their investment strategy.
Nearly 37 per cent said they allocate up to 10 per cent of their portfolio to illiquid assets, while 3 per cent allocate more than 25 per cent. Just 2 per cent said they have no specific allocation to these investments.
Alpha Real Capital noted that the research results are timely since the Pensions Regulator confirmed in August that there will not be a cap of 20 per cent on illiquid investments, which was first mooted in its combined code of practice consultation.
In its interim response to the consultation, published on August 24, TPR said it had received “strongly argued comments concerning a limit on unregulated investments”, often referred to as the 80 per cent or 20 per cent rule, because it would prohibit schemes from holding more than 20 per cent of their assets in unregulated markets.
“Our intention had been, and remains, to protect members of poorly run and typically small schemes from investments in poor-quality or inappropriate assets,” it stated.
“In setting out that expectation, we inadvertently created a position that would affect well-governed, typically larger schemes that hold unregulated assets as part of a well-managed investment strategy.
"We will not be proceeding with this expectation in the way it is drafted,” it continued, adding that TPR “will explore options for achieving our original policy objective while allowing schemes with liquidity risk management plans and prudent investment strategies to maintain exposures to unregulated assets”.
Boris Mikhailov, head of client solutions at Alpha Real Capital, said: “Illiquid assets offer the opportunity to earn a premium above more liquid assets, which helps explain their growing popularity with pension scheme investors.
“With returns on some other asset classes squeezed, it makes sense to consider illiquid assets, and nearly six out of 10 schemes are already allocating up to 25 per cent to the sector and the overwhelming majority are using illiquid assets in some shape or form.”
