Daily liquidity impediment to returns – DCIF

Daily dealing is limiting investment options in DC pension schemes, ensuring investment options are inferior to those available to DB funds, according to a new paper from the Defined Contribution Investment Forum (DCIF), the fund manager body.

The report, Mind the Gap, argues DC members are currently receiving inferior investment services to those enjoyed by DB members because of a more restricted access to asset classes which give effective diversification. 

Certain investment strategies, notably those which require less liquidity, are currently out of the reach of DC schemes because of requirements around daily pricing and daily trading, disadvantaging DC members through denying them the benefits of diversification and the illiquidity premium, the paper says.
The report points out that daily dealing is not a regulatory requirement and so current requirements imposed by providers and schemes should be relaxed to enable DC members to benefit from access to the widest universe of investment strategies. The DCIF accepts this is not without its challenges and the DCIF encourages the sharing of best practice and the championing of the cause by industry trade bodies like the NAPF and IMA.
The report points out that DC schemes are considerably less diversified than DB schemes, with a far higher reliance on direct equities and far less exposure to alternative asset classes such as property, commodities, private equity and hedge funds. It argues while access to property and private equity can be achieved through listed vehicles, doing so involves greater volatility than through direct volatility. Cash buffers can also knock up to 100 basis points off performance, it argues.
It also argues that attitudes to defaults are changing, with trustees increasingly prepared to sacrifice some liquidity if it were likely to lead to better returns.
Nest, which does not have the same requirement to be able to offer daily pricing because members are unable to transfer out, has already accessed real estate and is investigating investing in infrastructure.
The authors of the report accepted that offering illiquid investments will cause platforms to bear more liquidity risk, which would become more burdensome under Solvency II when capital requirements are more tightly contingent on risk.
A recent Towers Watson report found: ““Not having daily trading can cause some administrative issues. This would need to be thought about carefully when constructing solutions which incorporate investment products that cannot be daily traded…none of which we believe is insurmountable”
Outgoing chairman of the DCIF and investment director, Standard Life Investments, Andy Dickson says: “We believe that at present there are many DC schemes which do not give members adequate access to excellent investment services. Part of this problem is the lack of effective diversification through new asset classes. The opportunity for greater diversification is a potential enhancement to current best ideas and has the potential to both improve member outcomes and also to improve the member journey.”