Background
Under the previous UK Government, an agreement was established setting out aspirations for the largest pension providers to invest 5% of their default investment strategies into unlisted equities by 2030. In November 2024, the current Government announced they will broaden out this initiative using legislation in the form of a new Pension Schemes Bill in 2025 [1].
This article considers what this could mean for employers who utilise defined contribution pension providers (such as group personal pension plans) for their workplace pension.
What are illiquid assets?
In the context of defined contribution pension schemes such as workplace auto enrolment pension schemes, illiquid assets are types of investments that are not as easily realisable as cash and therefore cannot be traded easily in the short term. Commercial property is an example of an illiquid asset and can quite often be found in some of the underlying default strategy portfolios. Commercial property can sometimes be difficult to sell on, or can fail to generate sufficient tenants, therefore proving to be an illiquid asset.
In the 2024 Mansion House statement, the Chancellor outlined the objectives of legislative change in order to free up funds from UK pension providers to invest in new UK businesses (unlisted shares/private equity), infrastructure and local projects, all of which can be classed as illiquid assets.
Considerations for large pension providers
When investing in private equity, returns can often be great, as are the risks associated when companies fail, or underperform. Pension providers have to balance the requirements to target good outcomes for members with regard to their investments against the risk of losing capital through poor investment decisions. The cost to the pension provider of investing in unlisted companies can often be much higher than listed companies, and therefore the charges that the members ultimately pay may also need to increase. Default strategies are ultimately capped on the amount of charge a pension provider can deduct from member funds.
When investing in infrastructure projects, these can take a long time to come to fruition, without any realisable returns in the short term. Where there are peaks in cash outflow from schemes, such as members drawing their funds at retirement, the underlying default investment funds need to be sufficiently large to allow for these cash withdrawals.
The Government is therefore proposing that only large or so called ‘mega’ funds will be sufficiently capable of using these types of investments to generate good outcomes for members.
What does this mean for UK employers?
As covered in part one of our default investment strategy series, for the majority of employers, where a pension provider pension scheme is used to satisfy auto enrolment duties, such as a group personal pension or multi-employer master trust, the overall governance relating to the default strategy sits with the provider. However, with the introduction of any significant change to pension legislation, some or all pension providers may need to make significant changes to the default strategy, or ultimately change the underlying strategies altogether.
What actions can an employers do to prepare?
- Understand your pension provider’s current position in relation to the Mansion House speeches and subsequent consultation.
- Ascertain whether the pension provider is currently making changes or is likely to in the near future.
- Schedule financial education sessions into employee communication plans for 2025 to ensure that members are fully briefed on any changes as they come through.
If you would like help in reviewing your default investment strategy, or discussing how members could ultimately be encouraged to take control of their own plans, please contact your Mattioli Woods consultant.
