In the UK, a fragmented pension system has meant we’ve never really had globally significant asset owners on the scale of the Californian, Scandinavian, or Australians but that’s on the cusp of changing with the rise of DC Master Trusts – that’s great news and should be celebrated and supported.

Consider this: the top 100 asset owners worldwide, a group that could fit into a large conference room, control a staggering US$23.4 trillion in assets. Yet, the UK lags behind, with only a single asset owner making that list1. Australia is home to five of the top 100 and Canada eight.

Master trusts have quietly been one of the success stories of automatic enrolment. Two new master trusts alone, The People’s Pension and NEST provide a pension for more than 6 million active savers – roughly a quarter of the private sector workforce. These new savers are the core of the population brought into the scope of pension saving by automatic enrolment. They are mostly people who could not be served by the traditional pensions industry at an acceptable charge rate. It’s astonishing that one in four people working in the private sector are saving into two pension schemes that barely existed a decade ago, which are now central to the delivery of pensions policy and importantly overseen by independent fiduciary Boards.

Why does this matter?

Independent Asset Owners, separate from asset managers, constituted with a clear fiduciary duty toward members is what’s needed for top-class management and stewardship of members assets. Why?

There are things that independent asset owners do that others don’t or can’t: challenging the industry status quo, acting at arm’s length, not tied to a single commercial asset manager, cutting through agency issues and protecting consumers with real strength through fiduciary duty and an independent trustee board. The Australian Super Fund industry is one of the better global examples of this.

One timely and important illustration of this is private markets. Good and bad investments exist in private markets, but the real big issue is that the impact of agency issues in private markets is far, far larger than in public markets, and this frequently costs investors in terms of their net returns. To take one example, what frequently happens is that a group of assets are identified that have superior returns, but the fund is set up in such a way that the investor effectively turns around and pays most or all of that excess right back to the manager in fees. Sounds silly but happens all the time; it shouldn’t.

A study from CEM benchmarking2 showed that asset owners with teams investing directly in private markets did better than those using funds. Not because the underlying assets performed better but because they paid far less of that away in fees and that’s what matters.
Evidence from CEM benchmarking and the Thinking Ahead Institute shows that:

  • Internally managed private markets deliver substantially better net of fees outcomes, mainly due to the lower fee burden (CEM benchmarking)2
  • Asset owners able to follow a ‘Total Portfolio Approach’ outperform those following a Strategic Asset Allocation approach (TAI)3

Given all this, strong independent asset owners centred around fiduciary duty are essential for underlying savers to get the lion’s share of the potential benefits of private markets. It follows that fiduciary oversight is an enabler of private market investment and not a barrier. Greater diversification to support reduced volatility of returns is an important driver for fiduciary oversight.

There’s also a more practical point – Master Trusts in the UK can operate a custodian, as opposed to a platform model. Platforms are great for getting up and running at a small scale, but to really access the full range of assets and leave the benefits in the hands of the member you want a custody model where the asset owners have the benefit of owning assets directly and structuring each investment in the right way for the asset class, rather than being forced to conform to platform requirements that often are suboptimal outside vanilla asset classes.

A second important ingredient in all this is scale. To invest directly in private markets, you need scale – the ability to hire teams to do due diligence on the assets and structure the deals. Deal sizes are often large so to ensure diversified portfolios this sets a lower limit on the total asset size at which its feasible. The resources to do all this come along with greater scale. Small-scale asset owners are limited to investing in others’ funds, meaning they are effectively ‘renting’ that scale from the industry and paying for the privilege. They don’t benefit from being able to do co-investments and direct deals (which typically reduce overall fees substantially).

When you look at large ($100bn+) independent asset owners globally, particularly Australian, and Canadian funds, they typically invest a sizeable amount into private markets. There’s every reason to think the same will happen in the UK if our existing independent asset owners are supported to continue to grow and invest guided by fiduciary duty under the oversight of their trustee boards. That is why we are currently implementing plans that will enable this type of investment to be considered as part of The People’s Pension funds.

Master Trusts in the UK are a success story to be celebrated and supported and offer a pathway to the UK having truly global asset owners for the first time ever; this is good news for all.

Dan Mikulskis, Chief Investment Officer, People’s Partnership, provider of The People’s Pension