Defined Contribution (DC) pension schemes’ investment in alternative assets could see “significant progress” following recent economic challenges, research from the Pensions Policy Institute (PPI) has suggested.
Commenting on the publication of its report “What role could alternative assets play in DC investment strategies in the future?”, which was sponsored by the World Gold Council, PPI senior policy researcher, Lauren Wilkinson, stated that the next couple of years will be “crucial” for alternatives, suggesting that progress could “ramp up”.
The report suggested that current investment in alternative investments is “relatively low” among DC schemes, highlighting research from Mercer that found that the average allocation by UK DC schemes to alternatives in 2021 was 33 per cent, 21 per cent lower than for equities.
However, Wilkinson suggested that there could be progress over the next two years, stating that the “current economic challenges” of the war in Ukraine and increased inflation have led to an “increased focus on alternative assets”.
Wilkinson continued: “With this high inflation and, potentially, low growth environment, the use of bonds is not necessarily the most effective way to deliver the returns that members will need”.
She also argued that barriers to alternative investments for DC schemes are “becoming less of a barrier over time”.
One such barrier identified by Wilkinson was the knowledge and understanding of pension schemes, as she revealed that there is “hesitancy to engage and a bit of uncertainty”, particularly amongst smaller schemes and the smaller end of the market.
However, Wilkinson identified some progress in this area, saying: “We are definitely seeing the growing understanding of the alternative assets’ benefits and the risk mitigation benefits this can add to a DC portfolio”.
The scale of DC schemes was also identified by Wilkinson as a barrier as she argued that whilst there has been growth in the DC market, it is still lagging behind its defined benefit counterpart and a larger scale would be needed to allow schemes to be “more dynamic and opportunistic”.
Yet there are signs of progress, as Wilkinson highlighted the potential impact of investment vehicles that seek to alleviate availability challenges for smaller schemes, such as the Long-Term Asset Funds (LTAF).
Additional reasons for progress in alternatives were identified in the report, including input from the government through working to facilitate and encourage greater investment in alternative assets, in particular illiquids.
A greater focus on environmental social and governance (ESG) considerations as a result of rapid regulatory growth was also identified in the report, as it was said to have driven increased interest in the role that alternative assets could play.