There are lots of opportunities in private markets, including in the equity, debt and green infrastructure markets.
As long-term investors too, we believe DC savers should also have the opportunity to benefit from the good long-term returns these assets can provide, as well as the 'green' credentials of many of the investments within this universe, while being able to mitigate some of the risks around being invested in them.
The requirement from October this year for schemes to state their policy on illiquid assets in their statement of investment principles will put this firmly on trustees’ agendas.
FTA: Will the government’s illiquid assets plans work or will the risks likely outweigh the rewards?
RT: There’s been lots of talk about the government wanting to use pension fund assets to fund investment known as 'productive finance', such as UK infrastructure and green energy supply.
From a pension scheme’s perspective, while these types of funds have attractions from an investment point of view, a sole focus on the UK would mean opportunities for investment overseas would consequently be limited.
At the end of the day, trustees of pension schemes have a fiduciary duty to consider what investments will deliver good outcomes for members.
Over the past 10 years, we’ve seen a move away from significant exposures to UK equities within pension portfolios as global markets have offered wider opportunities and, in many cases, better returns than could be achieved by UK companies.
We believe the same principles should apply to investment in private assets, ie a global approach should be taken to identify the best possible investment opportunities.
The risks of investment can be mitigated to an acceptable level like other asset classes, which should mean the government’s vision for investment in illiquid assets should be achievable and reap reward for pension scheme investors.
FTA: What share of total pension assets could end up in such assets in practice?
RT: As highlighted above, we believe around 20 per cent of DC pension scheme assets could, over the medium term, be invested in illiquid assets.
There is potential over the longer term for this to go further, as seen in other markets like Australia where investment by the super funds is in some cases in the region of 30-40 per cent.
FTA: What are the opportunities for pension funds to take a leading role in the fight against climate change?
RT: We believe that pension schemes have a pivotal role to play as the stewards of assets in driving a just transition, given the far-reaching impact of climate change both in terms of physical risk (to the environment around us) and transition risk (the risks associated with transitioning to a green economy).
