Alternative assets could boost retirement income without increasing risk, according to PPI report

by | Feb 2, 2022

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Defined contribution (DC) pension schemes could improve returns for members without increasing risk by adding alternative assets to default funds, according to a new report from the Pensions Policy Institute (PPI) sponsored by the Association of Investment Companies (AIC).

The report suggests that pension savers with particular characteristics might benefit from the inclusion of alternatives, which could lead to enhanced returns, lower volatility, or a combination of both.

A broad range of savers could benefit, including people who work for longer and higher earners, those with patchy work and contribution patterns, people who stop contributing at younger ages, and those without supplementary savings.

Guy Rainbird, Public Affairs Director at the Association of Investment Companies, said: “This research from the Pensions Policy Institute should reassure pension trustees that alternative assets can offer benefits to a wide range of savers, including those on lower incomes or who stop contributing early.


“It’s particularly helpful that the report modelled the impact of adding a range of assets to the mix, such as private equity, direct lending, infrastructure and property. All of these have different risk/return characteristics and different degrees of correlation with equities and bonds. All can offer benefits when building a portfolio for beneficiaries and there is no ‘one size fits all’.

“How default funds should access these assets is a key question. Investment companies are tried and tested vehicles for investing in illiquid assets. They have a closed-ended structure which protects funds against fire sales and suspensions, while offering liquidity through their listing on the stock market. They have a track record that in some cases extends back beyond the global financial crisis. This does not apply to other proposed solutions for allowing pension funds to access alternatives, such as the Long-Term Asset Fund (LTAF), which would rely on notice periods to resolve liquidity mismatches and could run into problems if those notice periods prove too short.

“The fact that investment company shares are traded on public markets provides the ability to adjust a scheme’s exposure, perhaps because of a change in strategy or in response to operational needs. These qualities could make investment companies particularly worth considering for smaller funds or those wanting to test the water and build their interests over time.”


Daniela Silcock, Head of Policy Research at the Pensions Policy Institute (PPI), said: “DC pension default investment strategies play a vital role in protecting members from high charging or overly risky funds. They also provide a safety net for members who cannot or do not want to make active investment decisions. However, changes could be made so that default strategies meet the needs of a wider variety of members through data gathering and tailoring strategies.

“Increased investment in illiquids and alternatives could increase the opportunity for returns while reducing volatility, though there may be extra costs for members associated with this course. Schemes looking to improve their strategies should explore the degree to which these options could help to better meet their members’ needs.”

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