Accessing Illiquidity

This saving commitment is long term in nature and, moreover, very few members elect actively to switch assets (other than within a lifestyle programme).  Despite these features virtually 100% of DC saving is in liquid, daily tradable asset classes.  Classical economics tells us that all these DC savers are in effect paying a premium to be in liquid assets (or foregoing an illiquidity premium).  Why?

Anecdotally it is said that short-termism and poorly designed remuneration structures in the equity market arguably still reward corporates for focusing only on short-term returns and share buy-backs, thus reducing capital investment in future growth.  There is an acknowledged shortage of long term investment capital.  How can DC products be structured to encourage true long-term capital investment – assuming this would be a desirable development?

This is a cross practice working party that will be managed by the DC advisory committee of the Pensions Board and will work with the Finance and Investment and the Resource and Environment Board to consider these and associated issues.  Specifically, we would like to address the following related questions:  Is sacrificing the illiquidity premium on DC savings a problem at the level of either the individual, company or societal level?  If so, what are the consequences?  What barriers exist to enabling true long-term capital investment in the DC context?  What product(s) might work in concept to facilitate such savings?  What changes and incentives may be required?

Outputs:

Paper on Illiquidity.