Investment managers with good governance procedures and focus on value will thrive in new DC landscape
Defined contribution master trusts have until 2030 to scale their default strategies to £25bn (Markus Winkler/Unsplash)
Asset managers will need to demonstrate a commitment to good governance as defined contribution master trusts consolidate in time for 2030, according to Jonathan Lipkin, director for policy, strategy and innovation at the Investment Association. Managers and master trusts will also have to “focus on delivering the best outcomes for their scheme members at a competitive cost”.
DC schemes and their investment managers will have to find ways to achieve "sophisticated scale" to get the best end outcomes for savers, Lipkin said in an interview with AOX’s sister publication MandateWire.
He said DC schemes and managers must build up investment systems that are "world class in terms of governance structures, [as well as] the behaviours and ultimately the investment decisions that flow from that".
A "cultural reset" with more sophisticated governance will give newly enlarged master trusts greater confidence as they dive into a broader range of asset classes "that pension schemes may not have been thinking about quite as much previously".
This will broaden the "opportunity set" for managers, Lipkin said. "And clearly, if you're a manager operating in [the pensions] space, that will mean that you should be potentially on a shortlist for selection."
The IA represents 250 full members from across the UK institutional investment industry, including large pension investors like the £34bn Railpen and the £31bn Pension Protection Fund. Its members invest around £10tn on behalf of UK and global savers.
Smaller schemes vie to reach £25bn threshold
Speaking to MandateWire Analysis at the Financial Times' studios in London, Lipkin said the IA would "probably favour a more organic way of reaching scale", and that master trusts face a "demanding timetable" to consolidate over the next few years.
Lipkin explained that while there was industry support for the objective of scaling up, the industry faced "quite a technical process".
By 2030, DC master trusts must have one main default arrangement meeting the pension schemes bill's £25bn requirement, though the bill will allow smaller schemes, which can get to £10bn by then, to enter into a "transition pathway" to reach the £25bn threshold by 2035.
Over the past few months, a host of DC schemes have ruminated on how they will meet the £25bn target. In July, the £6bn Smart Pension announced it had agreed to acquire the £545mn STM Group PLC. Jamie Fiveash, chief executive of Smart Pension, said the deal marked a "significant milestone in our growth strategy and consolidation efforts". The master trust has said it expects to reach £10bn in its assets under management by next year.
“We’re a little bit concerned that what you may end up doing is freezing the existing market in place”
The £3bn NatWest Cushon Master Trust said at the end of May that it had a "clear path" for reaching "the scale threshold through a combination of continued organic growth and inorganic activity".
While Lipkin acknowledged the transition pathway would "help some of the smaller master trusts", he questioned whether the move could stifle innovation among schemes that already qualify.
Lipkin explained: "We're a little bit concerned that what you may end up doing is freezing the existing market in place, so sort of saying, 'If you are a large scheme, you qualify'. But what happens in the future? How do we make sure that pension schemes feel empowered to innovate on behalf of scheme members?"
Cost versus value
Lipkin also said that the culture in the DC market had shifted "towards a focus on cost over value".
"I would stress this point about culture shift, because we are still starting from a place where we [have] very heavily commoditised our DC pension schemes," Lipkin said.
The IA has been active in campaigning for DC schemes to have a broader definition of value, rather than cost. Alongside its support for the government's new Value for Money regime, in a policy paper from July, the IA called for policymakers and the pensions industry to "ensure the retirement income market has a value-focused mindset embedded in the market place".
Lipkin also questioned the need for a government to compel funds to invest in certain ways, explaining that it is better to "change behaviours on a voluntary basis", which would lead to "much better long-term outcomes".
He said that forcing industry change would create the "potential risk of unintended consequences".
He added: "Something that you may feel is appropriate today, in terms of minimum asset size or steering towards certain markets, may not be true in five years or 10 years."