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UK defined contribution pensions should pool to harness illiquidity premium


Greater pooling of the UK’s Defined Contribution (DC) pensions could help schemes access more illiquid assets, enabling members to potentially benefit from improved retirement outcomes, a Schroders-sponsored study by the Pensions Policy Institute (PPI) has found.

Pooled DC schemes could use their scale to enhance their negotiating position when agreeing fees for illiquid assets, such as infrastructure, as well as develop the internal expertise to invest in alternatives directly.
Pooling could also result in stronger governance and reduced costs for UK schemes, according to ‘The impact of DC asset pooling: International evidence’ research paper. The study explored the DC landscape in the UK, comparing it to its international peers in Australia, South Africa, Mexico and Italy.
While many DC schemes in the UK have lower fees than their international peers, a long tail of higher-charging legacy schemes could benefit from asset pooling and a subsequent reduction in fees and better governance, the report found.
The paper also explored if regulatory requirements in the UK may still be acting as barriers to consolidation and how the use of daily pricing in DC schemes could be restricting their ability to diversify and access more higher yielding, illiquid assets.
International examples explored by the study indicated that pooling may have the potential to improve member outcomes within UK DC schemes. 
Lesley-Ann Morgan, Global Head of DC and Retirement, Schroders, says: “Asset pooling in DC schemes has been limited to date with few benefits to the majority of members in the UK. However, we believe that learning from positive international DC pooling experience is an important milestone in the journey to improving outcomes for UK DC members.
“By pooling assets, improving governance and focusing less on daily pricing, we believe outcomes can be improved for UK members. More creative ways need to be found in the UK to facilitate investment in asset classes such as alternatives and illiquid assets to better invest, improve and protect members’ outcomes for the future.”
Lauren Wilkinson, Policy Researcher, PPI, says: “The UK DC landscape is somewhat fragmented, with a large number of schemes and variation across the market. In general, larger funds provide evidence that pooling is associated with lower charges, improved governance and access to alternative assets such as infrastructure.
“Although some of the evidence from overseas is conflicting, this may be in part because of regulations and economic circumstances in each specific country. But if all the potential benefits of DC pooling could be realised in the UK, this could lead to better member outcomes through increased pot sizes and, as a result, a better standard of living in retirement.”
The focus so far in the UK has largely been on pooling in the Defined Benefit space, as evidenced by the recent move to consolidate GBP260 billion of Local Government Pension Scheme funds.

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