Capital Structure Forum: ‘No reason’ DC pensions can’t use private debt

DC schemes often falsely assume that regulations are preventing them from accessing private markets.

There is no reason savers in UK defined contribution pension schemes should not be able to access private credit, attendees at the Private Debt Investor Capital Structure Forum in London were told.

Speaking at the event, Trevor Castledine, principal at Crescent Consulting, said: “There’s no reason private credit can’t be accessible to DC investors if it’s also available to defined benefit savers. The problem is defined contribution funds have a perceived need for liquidity and daily pricing that makes very little sense.”

He added that a 30 year-old saver today who would not be accessing their pension for another 30 years simply doesn’t need daily liquidity and can afford to commit their capital for the long term.

Maria Nazarova-Doyle, principal and market engagement leader for DC and individual wealth at Mercer, agreed that there is a major misconception among schemes about their ability to invest.

“There are a lot of perceived regulatory obstacles, but a Law Commission investigation into this issue found there were no reasons DC schemes could no invest in private markets funds and that daily dealing is not a requirement,” she told the conference.

She said the work recently done by the UK’s rapidly growing NEST pension fund, which has recently awarded substantial mandates in infrastructure debt, real estate debt and multi-strategy private debt, was testament to the ability of DC schemes to back private markets where there was a will to do so.

“The one thing DC schemes do need is some product development and policy makers need to look at the price cap as well,” she added.

Currently, DC scheme default funds are limited to a maximum fee of 75 basis points, though this is a blended rate across the entire pool. With many private debt funds charging more than 75 basis points plus performance fees, the cap is seen as a significant barrier to DC entry into private markets.

Castledine said: “It’s foolish to have a price cap because if you want assets that deliver good performance then that costs money. If you want to originate debt effectively you need to hire a lot of people and that has a cost attached to it which isn’t simply fund managers enriching themselves.”

Nazarova-Doyle said the average charge in DC schemes today is 54 basis points, which provides significant headroom for more expensive investments in private markets, but said performance fees were a no-go for many DC fund trustees as they made treating investors who may have entered the investment at different times very complex.

Another issue raised at the conference was the vast cashflows coming into DC schemes on a monthly basis that needs to be deployed, which could be challenging for private markets managers to put to work. NEST itself is seeing several billion pounds of contributions every year, while this year DC pension contributions overtook DB contributions for the first time and the former’s assets under management are expected to exceed DB assets in the coming years.