Legal & General Property ("LGP") announces that Q3 net flows from corporate pension schemes saw £36 million from Defined Contribution ("DC") clients, compared to £17 million for Defined Benefit ("DB") into its balanced funds, marking the very first time that DC equity has overtaken DB for LGP's balanced property funds.
This comes just six months after the successful launch of LGP's new product, the Hybrid Property Fund (the "Fund"), which for the first time offered DC pension schemes a new and innovative way to invest in property funds while managing volatility and liquidity.
The Fund, which was specifically designed in conjunction with investment consultants to meet the optimum criteria of UK DC pension schemes, caters to the increasing long-term growth trend of DC by blending LGP's strengths in active property management with LGIM's renowned index-tracking and asset allocation capabilities. Investing in LGP's UK balanced fund (the Managed Property Fund) and LGIM's Global REITS Index Tracker Fund on a default position split of 70:30, respectively, it provides greater diversification and liquidity, while reducing fund expenses and the entry and exit costs typically associated with direct property investment.
According to Towers Watson, DC schemes' share of the UK's pension fund capital rose from 3% in 2000 to 40% in 2010. Furthermore, 88% of pension schemes offered to new employees are DC rather than DB. Yet the real estate sector's response to this emerging trend has, as a whole, been lacklustre - mostly consisting of attempts to shoe-horn DC schemes into existing funds, originally designed for DB schemes.
Net flows from DB schemes continue to be positive, but LGP has also noted the momentum moving from balanced UK exposure to focus on particular funds that offer long-dated income streams from secure covenants, with annual inflation-linkage; enabling liability-matching and thus attracting capital from index-linked gilt/bond allocations. Only last year, LGP launched its LPI (Limited Price Inflation) Income Property Fund, which offered DB pensions schemes a new way to invest in property with secure, primarily government-backed, inflation-linked sources of income, providing a more attractive alternative to comparable asset classes such as index-linked gilts. Whilst net new flows from DB into LGP's balanced funds may have been half that of DC, when liability-matching mandates are included, gross inflows from DB schemes exceeded £50 million over the quarter.
Pete Gladwell, Business Development Manager at Legal & General Property, adds:
"Whether this figure represents an inflexion point or is simply indicative of a growing trend, we see no let up in the growing demand from Defined Contributions clients, supported by increasing research evidence and recommendations from the leading investment consultancies. This trend requires new fund models, structurally designed to provide the liquidity and diversification that DC clients require, which are supported by systems that can provide the array of features required by DC platforms and clients. It represents an exciting challenge for the industry, with success predicated on scale, performance, and service."
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