Defined contribution (DC) master trust providers are expected to be "big investors" in illiquid assets in future, after research from Isio revealed that all 12 providers surveyed intend to incorporate illiquid assets into their default investment strategies.

The research found that the majority of commercial master trust providers intend to adopt a dual default strategy, offering both “premium” and “low cost” defaults, with a smaller number of providers opting for a single default strategy that includes illiquid assets.

In particular, ten master trusts plan to allocate to illiquid assets throughout their entire lifespan, while two will focus solely on their earlier growth phase, potentially extending this over the long term.

According to the research, seven providers said they aim to begin implementing these changes within the next 12 months, with three providers aiming for the following 12 months.

Of the remaining providers, one has already confirmed implementation and one has yet to confirm their plans.

However, Isio found that planned allocations to illiquid assets within the overall default structure vary "significantly", with four providers estimating they will hold as little as 0-5 per cent during the growth phase, while two foresee allocating up to 16-20 per cent at this stage.

Isio also pointed out that allocation size is heavily influenced by whether a provider is targeting one or two defaults.

The findings suggested that providers are predominantly building diversified portfolios of illiquid assets, with private equity being the most popular choice, while real assets, particularly property and infrastructure, are also expected to see large allocations.

All of the providers survey were utilising a mix of internal and external managers to handle their illiquid allocations, although the survey found that there is interest in a variety of investment vehicles beyond Long-Term Asset Funds (LTAFs), which include blending co-investment or direct investment within the LTAF structure.

Isio highlighted the move to incorporate illiquid investments in default strategies as evidence of a "significant evolution" in the UK DC master trust market, which could bring enhanced investment strategies and diversified portfolios.

Commenting on the findings, Isio partner, George Fowler, said: "DC master trusts are clearly going to be big investors in illiquid assets in the years ahead, and they will form an increasingly important allocation within their default investment strategies.

“This approach promises to enhance portfolio diversification and potentially deliver better long-term outcomes for members, and we expect schemes to prioritise increasing these allocations in the growth phase.

"The next 12-24 months will be crucial as providers implement these changes, and we look forward to supporting our clients to realise the opportunities."

---