| | OCTOBER 2023MANAGEHRMAGAZINE.COM8In MyOpinionLIQUIDITY CONCERNS SHOULD NOT PREVENT AUTO-ENROLLED SCHEMES FROM INVESTING IN ILLIQUID ASSETSBy Lee Hollingworth, Head of UK Retirement, Franklin TempletonWhen it comes to quality of portfolio design, the UK's Defined Contribution (DC) pensions schemes are considered by many to be inferior to their Defined Benefit (DB) counterparts.While DB schemes invest in a range of illiquid markets, DC schemes are instead highly concentrated in listed securities, particularly equity index trackers.Why include illiquid assets?According to the recent Productive Finance Working Group (PFWG) report, there are three reasons to include illiquid assets in the default portfolio of a DC pension scheme.Investing in private markets improves diversification as less liquid assets offer different return drivers and access to different markets which can reduce risk. These assets offer access to an illiquidity premium which may deliver higher risk adjusted returns net of costs and charges.These assets also have the potential to access inflation-linked cash flows to offer members some purchasing power protection. At the moment DB schemes have access to these benefits while many DC schemes do not.Future wealthThis is despite DC schemes being responsible for the future wealth accumulation of a majority of the UK's working age population. The current value of DB assets in the UK is estimated to be over 3.5 times the size of occupational DC assets but over time the relative sizes of these pots will shift1.Eleven years since the launch of automatic enrolment in 2012, there are now 18 million active savers in UK workplace DC schemes. Over this period their assets have increased from around £200bn to around £600bn and are expected to double to £1.2trn by 20312.As DC schemes grow and become a more important contributor to the wealth of UK citizens, the industry should be thinking about Lee Hollingworth
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