XPS answers Mansion House calls by launching first-of-its-kind solution for small and medium sized DC schemes to allocate 20% to illiquid assets

XPS answers Mansion House calls by launching first-of-its-kind solution for small and medium sized DC schemes to allocate 20% to illiquid assets

29 May 2024

• XPS Pensions Group has today launched a new approach for small and medium DC schemes to target a 20% allocation to private market assets in default strategies
• This move comes in answer to the Mansion House objective of committing DC pensions to allocate at least 5% of their default funds to unlisted equities by 2030
• Schemes which implement this innovative approach should expect higher returns and greater diversification, with scope for more direct ESG impact through targeted private investment

XPS Pensions Group, a leading pensions consulting and administration business, has today announced it has developed an approach that can target a 20% allocation to private market assets within default strategies. This strategy is accessible for DC schemes with total assets of £30m and above. 

This move comes in response to the Chancellor’s Mansion House reforms announced in July 2023, recent Government proposals and the pension industry’s current ambition for more Defined Contribution (DC) schemes to incorporate private market assets into their arrangements.

The solution is the first to provide wide-scale access to illiquids of this magnitude for small and medium-sized DC schemes. It is cost-efficient, while also offering the flexibility to be tailored to individual scheme requirements. A scheme invests via a platform provider who manages a blended fund, periodically rebalanced to maintain the target allocation. Each blended arrangement is a scheme-specific structure so there are no other investors to deplete the liquid component.

The arrangements would include additional fees of the order of 0.4% p.a. compared to investing in a traditional liquid strategy, which XPS believes will be offset by higher returns and greater diversification from listed markets than otherwise possible. XPS projects that the additional net return would be expected to increase a typical member’s pot by 7%. In addition to expecting higher returns, the private market focus also provides scope for additional ESG impact through targeted private market investment in key sectors.

Mark Searle, Head of DC investment commented: “There is a huge opportunity for DC schemes to benefit from growth in private markets, but until now, this has only been accessible for the largest schemes. This approach is the first of its kind to provide access of this magnitude to illiquid private market assets for mainstream small and medium-sized DC schemes. We set out with the ambition of creating an approach that allows as many DC members as possible to benefit from the merits of private market assets, without having to wait for a change in regulation from the Government.“

Simeon Willis, Chief Investment Officer added: “What’s unique about this approach is that each scheme will have its own arrangement, combining liquid and illiquid assets. This gives them autonomy over choosing funds and how the allocation changes through time, and crucially maintains independence from other investors. This new approach will give schemes substantive exposure to illiquid assets, without the potential for other investors to eat up their liquidity buffer for breakfast.  This liquidity snaffling has caused high profile difficulties for pooled arrangements which have attempted to overcome the need for liquidity by pooling liquid and illiquid assets together in a daily traded fund.”