Daily liquidity in defined contribution (DC) pension schemes means savers lose out on extra returns from less liquid alternative investments, a group of investment professionals says.
Pension pots could increase by 5-10% if DC investors were allowed to access illiquid alternatives, the 300 Club – a group that raises awareness about market challenges – says.
The club –
chaired by Lars Dijkstra, chief investment officer of Kempen Capital Management, and involving senior pension funds figures – questions whether daily liquidity is necessary because research shows few savers take advantage of it.
Zuhair Mohammed, of consultancy Aon Hewitt and who has penned a 300 Club report on the issue called The hidden trade-off in DC pensions
, calls on governments to think more carefully about the hidden costs created by regulatory requirements for excess liquidity in DC pensions.
Forgoing illiquidity premiums presents a significant cost to DC members. Even where liquid versions of alternative asset classes exist, the 300 Club says savers could fail to gain an extra 5-10% return over the average lifetime of a pension pot, compared to illiquid investments in real estate, hedge funds, private equity and infrastructure.
As well as missing out on the illiquidity premium, savers also miss opportunities for diversification, which could cost them as much as 5% of additional pension savings, the 300 Club says.
Society at large is also a loser from excess liquidity in DC schemes, Mohammed says, because it restricts illiquid investments, many of which are good for the economy and society.
“The cost of excess liquidity in DC pensions to tomorrow’s pensioners and to society as a whole is significant and governments, as a minimum, have a moral obligation to create transparency around this issue and educate investors about the hidden and unrewarded trade-off of excess liquidity, which will be felt both financially and in their quality of life.”
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