(April 5, 2013) - Britain’s government-backed multi-employer defined contribution (DC) scheme has proposed a radical new idea to help it make the most efficient use of its illiquid assets which will see retiring members “sell” them to younger ones.
The National Employment Savings Trust (Nest) uses a target date fund strategy, and had seen illiquid assets cause problems for DC members when their funds reach maturity ahead of retirement. If the markets are going through a difficult patch, it can be costly to sell them back to the market.
Under the new idea, maturing cohorts will be able to sell these assets, which could include funds in real estate and infrastructure, to younger cohorts within Nest, thus keeping the assets and ensuring the older members can derisk for a fair price.
Speaking to aiCIO, Nest’s chief investment officer Mark Fawcett said: “We haven’t seen this idea done by anyone before or elsewhere around the world – and we did look globally to see how others were coping with the problem of illiquid assets.
“Australia’s obviously got the biggest DC market but target date funds haven’t really taken off there. And in the US the target date funds tend to only invest in liquid assets. We thought this was a much better solution.”
Fawcett continued that Nest had been concerned about what had happened to Australian savers in 2008, when illiquid assets became even more difficult to sell off due to the valuations being hit.
“We realised we needed to be innovative, and to be able to manage the cashflow around them,” he said.
“The challenge is what price do you transfer those assets at? We’re working on this now – it’s hard to say exactly. As with any illiquid asset, it’s hard to put a price that is 100% accurate on it, but providing there’s a fair process it [can be done].”
Nest is propositioning itself as a low-cost DC option for employers in the UK, and therefore illiquid assets with their higher price tag are likely to only make up a small proportion of Nest’s portfolio.
It had been reported that it was planning to sign up to the Pension Protection Fund’s (PPF) infrastructure platform – designed to help schemes collectively invest in UK infrastructure projects – but Fawcett played down the suggestion to aiCIO.
“The PPF is opening up to other investors over the coming year – but until they’ve chosen their fund managers and their objectives we’re not in a position to commit to the platform,” Fawcett said.
He added that Nest, as a new DC scheme, was different to existing partners, who had established defined benefit schemes and were able to commit lump sums to the platform ahead of its general launch.
Related news: Nest Champions Responsible Investing Among UK Pensions