However, whether they are suited to a portfolio will depend greatly on the balance of needs between liquidity (driven by value of net flows) and long-term income and growth (more a function of the maturity of the scheme and the age profile of the membership).
Notably, just as the government is considering enforcing greater use of illiquids for defined contribution pension schemes, defined benefit schemes are reportedly cutting their exposure to these assets.
Smaller schemes cannot generally access infrastructure at a cost that can be borne within the auto-enrolment charge cap, and I agree this provides one more argument for removing uneconomic schemes from the market.
Focus on what the member needs
As both the Financial Conduct Authority and The Pensions Regulator are only too keen to tell us, price is only one aspect of value.
And consumer duty rules have gone to great lengths to ensure firms across financial services are making sure customers can truly understand the products they are being offered.
The proposals for multi-consolidator are, by the DWP’s own admission, not necessarily the easiest for members to understand.
Why, for example, would a member be better off having their pension pot moved from a provider they have a relationship with already (and likely an online account), to a new provider they have no relationship with?
Consumers will generally better understand the concept of taking their pension with them from workplace to workplace. The primary legislation and the transfer standards and systems already exist for this, and, for very little additional work, 'pot follows member' could be a reality.
Cleaning up of historic deferred pension pots could be done as a second phase, once the pension dashboards are in place, by re-using the newly set up ISP infrastructure.
Does the member really need investments in illiquid assets? I think that is an open question, and one that trustees and their advisers are best placed to answer.
Trustees should be free to choose the right percentage of assets to allocate to these as part of a well-diversified portfolio, rather than having a set percentage mandated by central government.
In summary, while solving the problem of deferred small pots will lead to a more efficient system and ultimately should lower costs for all schemes, the multi-consolidator model proposed does not meet the remaining assessment criteria from January’s consultation paper.
There are better means of improving member engagement, including the pension dashboards and pot follows member.
Concentrating workplace pensions into a narrow set of consolidators reduces competition in the market. The proposed clearing house or central registry introduces new cost, complexity and cyber risk to the system and could ultimately undermine member confidence if it leads to data breaches.
