Pensions schemes set to increase allocations to illiquid assets

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New research from Alpha Real Capital (Alpha), a specialist manager of secure income real assets, shows UK pension schemes are increasing their allocations to illiquid assets thanks to greater transparency, increasing opportunities and the diversification benefits.  

This research is timely given the recent news that The Pensions Regulator will not proceed with a proposal to cap investment in unquoted assets to no more than a fifth of a portfolio.  Such a cap would clearly have been at odds with pension scheme intentions according to Alpha’s findings.

The survey of 100 UK professional pension fund investors found:

• Some 85 per cent of UK professional pension fund investors say the scheme they work for will increase its allocation to illiquid assets over the next three years, with 7 per cent expecting a significant rise.

• Illiquid assets are growing in popularity across the pension scheme sector as they offer the potential to earn a premium over more liquid assets.

• Schemes already have substantial allocations to illiquid assets – around 58 per cent of investors say their scheme allocates up to 25 per cent to illiquid assets as part of their investment strategy.

• Nearly two out of five (37 per cent) say they allocate up to 10 per cent of their portfolio to illiquid assets, and 3 per cent allocate more than 25 per cent. Just 2 per cent say they have no specific allocation to illiquid assets.

Alpha’s research shows the main reason for increasing interest in illiquid assets is greater transparency around the asset class with 79 per cent saying they are increasing allocations because of that. However, 69 per cent say increased opportunities to invest in illiquid assets is driving interest.

Around 44 per cent of those questioned say they are increasing allocations to illiquid investments because of a growing desire to diversify their portfolio while 8 per cent say improvements in the premium for investing in illiquid assets is driving interest.

Most investors are happy with an additional premium for investing in illiquid assets of less than 1 per cent, the research found. Around 58 per cent say they expect an additional premium of between 0.5 per cent and 1 per cent while 4 per cent will settle for less than 0.5 per cent. However, a third (34 per cent) expect a premium of between 1 per cent and 1.5 per cent while 4 per cent look for an additional premium of more than 1.5 per cent.

Boris Mikhailov, Head of Client Solutions at Alpha Real Capital, says: “Illiquid assets offer the opportunity to earn a premium above more liquid assets which helps explain their growing popularity with pension scheme investors.

“With returns on some other asset classes squeezed, it makes sense to consider illiquid assets and nearly six out of 10 schemes are already allocating up to 25 per cent to the sector and the overwhelming majority are using illiquid assets in some shape or form.”

Shajahan Alam, CDI Director at Alpha Real Capital, adds: “Pension funds are increasingly looking for certainty of returns through contractual cashflows, higher yields and portfolio diversification.  This means growing allocations to illiquid assets.  

“For example, Commercial Ground Rents and Lifetime Mortgage assets can deliver steady and reliable returns that match pension scheme cashflows while generating between 4 per cent to 5 per cent per annum above comparable government bonds. Commercial Ground Rents provide the added benefit of being inflation linked.”

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