Concerns that illiquid rules will increase governance burden on trustees
These proposals and regulations were outlined in a mass consultation package on March 30 which included the government’s response to its November charge cap consultation outlining proposals to exclude performance fees from the 0.75% cap. on charges in default agreements, as well as a response to its June 2021 Consultation on Barriers to Further Consolidation of the DC Market.
Two new consultations – one on proposed employer-related investment (ERI) regulations and the other on “disclose and explain” proposals to boost illiquid investment opportunities – were also included.
The package ends today with industry feedback; while the “disclose and explain” proposals received a largely positive initial reaction, larger questions about the overall relevance of the proposals to improving member outcomes are clear in several responses.
Under the proposals, plans will have to set out their policy for investing in illiquid assets and disclose their holdings of those assets on a quarterly basis.
Jenny Roe, principal consultant in DC investments at Isio, said her business was “sustainable to the use of illiquids in DC strategies” and that investing in large projects and principal trusts would be “crucial”.
But she added: ‘We are wary of the ever-increasing governance burden that administrators face.
Lane Clark & Peacock (LCP) raised a number of questions in its response, noting that “well-intentioned” measures could miss targets and increase plan costs – another burden on administrators.
The consultancy argued that the information required to comply with “disclose and explain” would not be read by members and therefore would not increase much-needed engagement within the industry.
“As it stands, these proposals could increase plan costs without improving member outcomes,” warned Laura Myers, partner and DC manager. “Member engagement is unlikely to be improved by adding complex financial information to little-read documents, especially since these requirements only apply to default fund investments that apply to the most common plan members. less engaged.”
LCP also highlighted the cost of collecting the necessary data, especially given the frequency of quarterly requirements.
Myers said it would be “unnecessarily costly and burdensome” for administrators, adding: “Many plans can only make strategic decisions about their asset allocation on an annual or triennial basis.”
Finally, the consultancy’s response said it did not believe the government’s proposals would “address the real hurdles” when it comes to DC schemes investing in illiquid assets.
“In particular, trustees need more guidance from government on how best to reconcile greater use of investments which entail less frequent pricing and the consequent ability for members to ‘earn’ and to” lose,'” Myers said. “We also have the problem of locking up funds for long periods of time with requests from members who expect to access their funds at short notice.”
Natalie Winterfrost, chair of the Society of Pension Professionals (SPP) investment committee, agreed with Myers and suggested that “disclose and explain” be limited to “CDs only and the CD section of hybrid plans.”
“‘Instant’ disclosure is adequate and would be appropriate disclosure that would achieve what we believe to be the intended policy objectives,” she said in the PPS response.
“Many DC plan administrators reject the idea of illiquid investing because of the many known challenges,” she added. “The ‘disclose and explain’ policy does not directly address any of these issues, but it may require periodic review to determine whether the reasons for not investing are still true and, like other policy solutions, address what precedes, can encourage DC investments in illiquid assets as soon as possible.”
Winterfrost also raised concerns about “perceived competition” between systems driven by the perception that higher illiquids are better encouraged by disclosures.
“It could potentially be detrimental to the responsibility to run a scheme in the best interest of its own members,” she explained. “We strongly believe that the Department for Work and Pensions should justify the benefit to members before requiring these asset allocation disclosures.”