As the Pension Schemes Bill winds its way through Parliament, pension providers and corporate advisers are adapting to this new legislative context, which has coincided with a shift in the industry’s approach and mindset, particularly around investments.
Providers, for example, are considering how many defaults they may offer in an era of megafunds. And both providers and corporate advisers are debating what the ongoing embrace of private markets means for investment strategies at both the accumulation and decumulation stage of the retirement journey.
Given the wider adoption of private market investments into default strategies, advisers are also pondering what the new focus on value rather than cost means, albeit within a price-capped system.
New default strategies
It is clear that the shift towards private markets and a value-led approach is already underway, with a number of providers recently unveiling new default strategies.
Maiyuresh Rajah, director of investments, Aviva explains the provider’s approach: “With the launch of My Future Vision, we had a lot of discussion about how best to implement private markets within the current structures. Right now, there are a lot of multi-asset defaults that are incorporating some element of private markets into the growth stage through a single fund with fixed asset allocation.
“We thought, could we innovate on that, to bring in private markets both pre- and at retirement, investing in different asset classes at different points in the journey. That means higher risk, higher return asset classes for the growth phase, then moving into less risky, more income-focused assets such as private credit and infrastructure prior and during retirement.”
The solution has been to utilise several external managers. “We have used five external asset managers, to give access to the different asset classes, which is different from other providers who are using one or two managers to cover private markets. We think you need specialist expertise in each area – a best-in-breed approach.”
Advisers are, of course, evolving their thinking rapidly, although they also point out that this shift towards private markets in DC is not entirely brand new.
Alison Leslie, head of DC Investment, Hymans Robertson says: “The journey into private markets for DC schemes and provider defaults is now gathering pace. In the early 2020s, pre-Long-Term Asset Funds (LTAFs), we had some allocations starting to be made by the likes of Smart, Nest and USS.
“With the Mansion House Compact, Accord and now the Pension Schemes Bill, this is gathering momentum. Many initially dipped their toe in the water using private credit, an asset class that can be used to improve diversification within default strategies and could potentially be used close to and even through retirement.
“We continue to see a split in the market with a number of providers opting to incorporate private markets exposure into their main default, whilst others have launched ‘premium’ defaults at higher price points, offering employers and trustees more choice over the extent of private markets exposure within their strategy.
“From there and with the advent of the LTAF, we saw many providers choosing a multi-asset approach to their LTAF design, with the likes of L&G, Aegon and others investing across the private equity, debt, infrastructure and even venture spectrum.”
She says the conversation is now moving to more specific sub-asset classes, with allocations to areas such as venture capital increasingly being considered, albeit as a smaller allocation. “L&G has added venture through their Universities spin-out fund and NatWest Cushon will shortly allocate to this asset class as well.”
Increasingly, these moves are also taking the glidepath to retirement into account.
Leslie continues: “We are now increasingly seeing the advent of single-sleeve asset classes at different points in the glidepath with growth LTAFs and more defensively positioned income-focused LTAFs becoming more commonplace. Interestingly we are starting to see private markets allocations running to and through retirement, and in some cases maintaining meaningful allocations right up to later ages.”
The value approach
In terms of managing the shift from cost versus value, she adds: “We are very much seeing the industry gradually embrace the shift from cost to value and consultancies, almost without exception, now take the value approach. Difficulties with cost do still persist for a minority where fees are near the charge cap.”
Kelly Parsons, head of DC proposition at Broadstone, says cost remains a key challenge that is on employers’ minds. She says: “There’s strong and growing interest in integrating private assets into DC schemes, but implementation is far from uniform. We’re seeing some providers launch new defaults incorporating private assets, while others are embedding them within existing fund structures.
“Cost remains the key challenge. Many employers are still cautious about the additional charges associated with private assets, which often leads to hesitation or rejection of new fund options.
“As a result, the subject is increasingly featuring in governance meetings, prompting more detailed conversations about suitability, timing and the likely impact on members.”
Leslie adds: “Employers with appropriate advice are embracing the added benefit that this may provide to their members and are embracing the shift from cost to value as much as they can within existing frameworks. We have been encouraged by the appetite of employers to really focus on member outcomes over cost to improve retirement incomes for their members.”
Parsons also notes that employers are increasingly using a ‘value lens’, but she says, for some, it will require tailored advice. “Employers are starting to view value through a broader lens and appreciate that it is about member outcomes, risk-adjusted performance and engagement – not just cost efficiency.
“The introduction of private assets is accelerating this shift, creating an ongoing need for review and consultation as schemes evolve and new investment structures emerge. Tailored advice is essential to help employers assess whether these approaches are appropriate for their workforce demographics and long-term scheme objectives.”
In terms of further communication with scheme members, Parsons adds: “As private assets move onto the DC agenda, employers are increasingly asking how best to communicate these changes to members. Given the complexity and relative unfamiliarity of the asset class, clear and accessible communication is critical to boosting understanding.
“This is driving growing demand for member-focused advice and communications strategies, which include using simplified language, visual tools and targeted materials. There is a notable opportunity for advisers to support both employers and members in understanding the implications of these changes and making informed decisions.”
A question of size
What of defaults and their size, and how does that relate to private markets? Royal London’s policy director Jamie Jenkins says: “While the Government is definitive on the minimum scale threshold, it appears to be pragmatic about how this is defined, acknowledging the complexities involved. The key phrase is ‘main scale default arrangement,’ alongside the reference to a ‘common investment strategy.’ The Bill is seeking to set the high-level principles and legal framework to impose the conditions, without being overly prescriptive on the detail.
“In practice, the test will likely need to be met through one main scale default arrangement, although this may not need to be a single fund, acknowledging the variations that may exist to suit different risk appetites.
“While this will involve many subscale funds being consolidated, there will no doubt be some that remain, either on ethical or religious grounds, or because they contain valuable, historic guarantees that can’t be replicated in modern default arrangements.
“The main objective is to ensure there is sufficient scale to invest in a way that isn’t easily achievable otherwise, and it would be unhelpful if instead pension schemes become bogged down in technical detail surrounding the definitions.”
Sceptical view
There are cynics concerning the whole initiative. Among those who offer both individual and workplace pension advice, it will be interesting to see if there is any resistance to private markets.
CanScot Solutions principal Robert Reid is in the sceptical camp both from an investment point of view and from a political perspective.
“With private assets, you have a dynamic risk profile, but it is not consistent. If you look at the trouble the retail market had with market-neutral funds, for example. I am not sure they are ever appropriate if you are talking about managing risk [later on in the pathway].
“If you are looking for growth it may be different. That is where you run into other issues. People struggle to analyse [these assets].
“You may end up having to ask your employer, how did you pick this? And if I was an employee being told about this new option launced with a fanfare, then the first thing I would ask is ‘can I get more details?’”
He also notes that advisers, when talking to retail clients, have seen so many restrictions around risk capacity that it remains extraordinary that providers are placing things they couldn’t recommend into workplace funds. He says they could almost be regarded as 100 per cent loss investments, albeit ones you could make a fortune from.
He also questions who ultimately benefits from this move towards greater private markets investment? “Why are members picking up the tab for this?”
