By Sonia Kataora, Partner and Head of DC Investment at Barnett Waddingham
The new guidance is intended to provide a framework for decision making. However, it does emphasise that decisions on investment must be made in the best interests of savers. This will include but is not limited to fee implications and ensuring appropriate governance processes are in place if there are problems with liquidity.
The regulator has also used this new guidance as a prompt for any own-trust schemes to consider if they have the capacity to consider private market investment, and if not, asking those trustees to consider consolidation into an arrangement that has the governance processes in place to provide (or at least consider) private market investment.
Importantly, this doesn’t just mean consolidation into a master trust - we increasingly see own trust schemes using ‘off-the-shelf’ solutions (allowing them to retain their existing governance model) and these will increasingly offer access to private markets.
While we welcome further guidance for trustees on how they could introduce and monitor private markets, trustees must maintain focus on what matters most to their members’ retirement outcomes.
Recent manager developments have highlighted how some investment platforms are still unable to support the use of illiquid assets. Many are therefore content to wait as a wider range of funds comes to market and investment platforms evolve their solutions – and, in the meantime, address what is often a greater threat to member outcomes: the cliff edge members face at the point of retirement.
While we expect larger DC schemes to consider the use of private markets throughout a saver’s lifetime, those schemes that have smaller governance budgets may once again feel the squeeze to consolidate into a master trust or by using an off-the-shelf product.
There is a danger that this becomes another driver of consolidation that sees the priority of cost over value. However, more expensive solutions that incorporate private markets are increasingly available from master trusts and off-the-shelf solutions. It’s essential those who are consolidating look beyond cost and consider what really drives value to their members.
For many, the number one priority will be the legislative requirement to include a policy on how illiquid asset classes are used in their default strategy before the deadline of 1 October 2024.
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