Aon CIO: ‘No guarantee bigger pension funds perform better’
Aon’s defined contribution chief investment officer Jo Sharples tells AOX why government policy to encourgage larger pension funds may have negative side effects (Reuters/Loren Elliott)
The British government has been single-minded in its pursuit of pension consolidation since the Labour party came to power in 2024. The reason for this? Larger schemes – ideally, megafunds with $34bn in assets under management or more – equals more private market allocations.
Pensions minister Torsten Bell expects this to improve returns for pension schemes and boost the UK economy.
But in a recent interview with AOX, Jo Sharples, chief investment officer for Aon’s defined contribution solutions, appeared to throw cold water on the suggestion consolidation leads to larger financial gains.
According to Sharples there is “no guarantee that being bigger gets you better performance”. Rather, it simply means you can invest more in certain assets.
She added that concerns are emerging in the Australian market that some investment opportunities are becoming “too small” because of consolidation.
This may well end up being the case in the UK, she warns. In Britain there is considerable focus on venture capital investing. The $35bn British Business Bank, the government’s economic development bank, recently launched Venture Link, an online portal that provides information on its VC investments.
The bank has also started and invested in its own venture capital fund, British Growth Partnership Fund I. UK pension schemes including Aegon UK, Cushon Master Trust (now part of WTW) and M&G have also made investments in the fund.
But Sharples said VC ticket sizes are often less than £100mn (or $136mn). For a large scheme, which may want to deploy £100mn to £500mn ($136mn to $680mn) per investment, this would prove to be a really small percentage of its assets under management, resulting in a hefty operational load for a limited shift in returns.
For example, Nest is the UK’s largest workplace pension provider at $75bn and an investment at the upper end of that range would be a 1 per cent allocation or less.
In other words, it’s a lot of effort for potentially very little impact.
Regarding the government’s push for private market investing, Sharples said this is not the only answer for schemes. For her the more important question is rather, “How do you take enough risk and make sure you are invested in the right assets?”
Over the past three to four years, Sharples has observed that the master trusts which perform better tend to have more in growth assets, particularly for their younger members.
But at the same time she noted that while equity should be a large part of any default strategy for younger people, there is also a temporary role for fixed income because of current yields.
Sharples continued: “We bought some short maturity inflation-linked UK government bonds a couple of years ago… they’re never going to give you 15 per cent return in a year, but they do tick along quite nicely. They’re probably one of our most stable, most resilient asset classes that we hold.”
She concluded that while private market investment would boost Britain’s economy “to some extent”, the priority should be making sure the UK was an attractive place for businesses.
Sharples also said the current concerns about private credit seemed “a little bit overblown”.
Following recent credit defaults from US companies including First Brands Group and Tricolor Holdings, the Bank of England is conducting a voluntary stress test assessing the macroeconomic stresses linked to private credit, the losses they create and how those losses cascade throughout the industry.
Sharples said the defaults provide a useful reminder that these are long-term assets: “If you don’t like that, you probably shouldn’t [invest in them].” She added that you can hedge against the risks of credit investing by ensuring your managers do the correct underwriting.
Aon Mastertrust is currently working through its manager selection process and will announce its choices later this year. Although Sharples refused to disclose any names at this stage, she said the final roster would have a mix of mainstream and more obscure managers, particularly in the defined contribution market.