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Innovations in Defined Contribution Investment Structure

28 October 2016

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Stuart Breyer looks at how to make sophisticated illiquid investing possible for the average UK saver.

With recent research stating that only 1 in 7 people are saving enough in their defined contribution plan, we ask; is innovation needed for the DC pensions industry? And if people aren't saving enough, how much should they be saving?

The rule of thumb I was taught was to save a percentage of my salary that is equal to half my age every year, from when I first start contributing to a pension scheme, until I retire.

So, if I start saving for retirement at 20, it is 10%, if I start at 30, then it is 15%.

The first step is to get people to save

Auto-enrolment (AE) has gone some way to help ensure that people in the workplace are making provisions for their future; however, contribution rates under AE are currently too low, and must rise significantly, and quickly, to make a difference for individual savers.

Furthermore, with the majority of people in workplace pensions opting for the default fund, there is still a long way to go to ensure scheme members are taking the right steps for them and their future needs.

The Redistribution of Intellectual Property from DB to DC

Many defined benefit pension plans have made incredible innovations in the way that they invest to ensure that all members receive their promised pension in full. These forward-thinking pension plans have sourced the assets that will deliver growth and match the interest rate and inflation risks resulting from their ever-increasing liabilities.

Due to their size, sophistication, and scale, they can access direct infrastructure investments, private equity, ground rents, social housing, residential mortgages, micro-finance? the list continues.

While making these types of investments, defined benefit pension funds keep a liquid component of their portfolio to pay pensioners on a monthly basis.

Yet, the question remains: how do you make these types of assets available to the 'retail investor,' or put another way, the typical UK saver?

The art of the possible for Defined Contribution

Unlike defined benefit pension schemes, the types of funds made available for retail investors are currently priced daily, and almost always offer daily liquidity. These two factors have (until now) made it extremely difficult to make illiquid assets available to individual investors.

This must change. Whilst having accurate pricing on a regular basis is an absolute must, how important is it really for an individual who is, for example, 30 years old, to have liquidity for money they will not need for at least 25 years?

It is my hope that innovation in this sector will lead to the formation of funds that will make these types of investments available to the individual.

Am I talking nonsense?

Perhaps, but is this something I would do? Absolutely! In a world where listed markets provide return (with lots of volatility), I'd much prefer to invest my money in meaningful projects that provide me with a stable positive return and in return, give back to wider society.

As an example, one fund that springs to mind is helping to house the homeless (via providing residential leases for five years), and returning 5%+ annually to investors.

Surely this is the missing element of our capitalist society? The allocation of capital to the best ideas, that provide a net benefit for society (above and beyond financial returns).

At the end of the day, everyone needs enough money to retire. Wouldn't it be great if the individual saver was given the option of investing their money so that their need is helped, whilst also helping society more broadly, or providing finance for long-term projects?

Stuart Breyer,Chief Executive Officer, mallowstreet.