The paper, commissioned by the leading Defined Contribution workplace pension scheme, and written by market analyst and leading investments expert Toby Nangle, coincides with the first stage of the Government’s Pension Review, which contains proposals to consolidate the workplace pension market in order for fewer, bigger funds to be able to invest in private markets.
The report finds that while there are nearly £1bn in potential fee savings available, no master trust currently has the scale to fully take advantage. This finding aligns with the Government’s own calculations, which state that investing in private markets delivers little additional value at current fee levels.
The People’s Pension report suggests that investing 10 per cent of all projected master trust assets in private markets via external asset managers by 2030 could cost these schemes, and ultimately savers, as much £1.5bn per year in fees. It explores various ways to reduce these costs, finding that approaches such as bringing fund selection and management in house, and successful co-investment programmes, which could reduce total costs by more than 60 per cent, or nearly £1bn.
But the UK’s biggest independent master trust, which recently reached £32bn assets under management, warns that the calculations are based on aggregate master trust assets. The report also states that while the largest trusts are growing rapidly, no individual trust currently has the economies of scale to deliver the largely internalised approach to investing in private markets that the report outlines. However, there are other options that master trusts could potentially explore, which would enable them to invest in private markets, whilst the industry is expected to focus on consolidation in the next few years.
Dan Mikulskis, Chief Investment Officer at People's Partnership, provider of The People's Pension, said: “Large pension schemes around the world tend to make significant investments in private markets as the government is championing, and we hope this report provides food for thought for both the industry and policy makers as we develop plans to invest the hard-earned savings of millions of UK workers.
“Private markets can contain exciting long-term investment opportunities for millions of pension savers, but too often the advantages are reduced, or cancelled out entirely because arrangements are such that asset managers take most of the benefits through high fees.
“As this report states, the best value approach to investing in private markets is for larger funds to develop appropriate skills and scale to access private markets investments in optimal ways – this might be through direct ownership, co-investment and not just through funds. The People’s Pension has recently outlined its intention to start investing in private markets and we are currently in the process of hiring the investment team members who will make this possible.”
Toby Nangle said: “Private markets offer opportunities to pension investors, but also challenges. And international experience shows that scale is the key to boosting member outcomes. For private market allocations to enrich pension members rather than only external fund managers, schemes need sophisticated internal capabilities.”
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