Defined Contribution Matters

19 July 2023

Chancellor Jeremy Hunt delivered his anticipated Mansion House speech on the 10th of July unveiling the nine inaugural compact signatories in Aegon, L&G, Mercer, Phoenix, Smart Pension, Aviva, M&G, Nest and Scottish Widows. As a cohort, this group represents approximately two-thirds of Defined Contribution (DC) assets within the UK.

The compact commits these DC funds to allocating at least 5% of their default funds to private equity by 2030.

The Lord Mayor of London, Nicholas Lyons, a prominent advocate for private market assets and for their role in pension schemes, laid the foundation by saying:

“I spend around a quarter of my time on official visits abroad, and I see how other nations are using pensions to fuel their economies and help pension savers. Some of the Canadian state pension funds and Australian supers – the most successful pension schemes over the last 30 years – invest between 35% and 50% in unlisted assets – in infrastructure, private debt, private equity and real estate.”

We are aware of the benefits that allocations to private markets can bring, vis a vis diversification and long-term outperformance relative to public markets. This means growing the investible universe for DC savers, which encouragingly, is the Value for Money framework in practice, putting member outcomes and long-term returns ahead of cost for the member. The Chancellor avoided any hint towards mandating a portion of this investment to domestically based companies which would ultimately go against the trustees’ fiduciary duty.

Speaking of Value for Money (VfM)

The focus of VfM remains on prioritising investment performance and service quality as key metrics, stripping back much of the onerous data points in calculating member outcomes. For schemes that cannot demonstrate performance based on the new metrics, they will be subjected to additional measures. This was an adjunct to the Chancellor’s Mansion House comments on delivering good outcomes for members.

The Australian Model

The Australian Superannuation model allows for freedom in choosing your own super fund.  Much of the competition between the super funds is based on member outcomes when it comes to performance and on investment exposures. With member demographics becoming increasingly younger, sustainability is playing an important and more visible role – A role the Long Term Asset Fund (LTAFs) can play in enacting real-world solutions.

Food for thought

This has led me to think, what is a potential outcome of increasing visibility around performance tables and the risk-return attributes of the DC schemes as member engagement also increases? What will this mean for members in a perpetually underperforming fund when there is no option to transfer to another provider, other than leaving your employer? Perhaps VfM should evolve to allow members to transfer to a new scheme provider of their choice, one that reflects and is better aligned to their values. I am by no means endorsing performance chasing from members’; however, it would certainly act as a lightning rod for schemes to improve long-term outcomes by allowing members to vote with their feet.

On the topic of private markets facilitation

The FCA published its policy statement and handbook rules on ‘broadening the retail and pensions access to the LTAF.’

This means reclassifying the LTAF from a non-mass market investment (NMMI) to a Restricted Mass Market Investment (RMMI). This allows the LTAF to be available to retail investors, subject to additional distribution requirements, such as providing the investor with a summary risk warning. This removes some of the reticence from fund managers in creating a vehicle strictly for UK DC savers, with the added capability to distribute the fund into the wealth channels.

For the world of DC, this now means that self-select DC default investors can invest in an LTAF, subject to an exposure limit and appropriateness assessment. The new rules also allow for retail adoption of the LTAF, again with added guardrails. With success in capital raising from the likes of Moonfare and Truffle, can we say that the democratisation of private markets is truly upon us?

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Photo by Clay Banks on Unsplash

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