How we’re thinking about the opportunities and barriers in private markets

James Lawrence, CFA, Head of Investment, spoke at the DC Under the Microscope Virtual panel. Here’s a recap of what was discussed.

The Smart Pension Master Trust has nearly one million members, and £2.2 billion in Assets Under Management (‘AUM’). We were one of the first master trusts to invest in private markets, with our private credit allocation launching in early 2021. 

Private markets bring about a significant number of opportunities for Defined Contribution (‘DC’) pension schemes in general, but there are still a number of barriers to getting there.

As an asset class, private markets have traditionally been inaccessible to DC schemes, including master trusts, largely due to platform capabilities and cost. The tide is starting to turn on the first of these, though, with pressure across the industry, including from newer entrants to the market, to expand capabilities. However, there is still some way for the platform market to go before this becomes the norm. Cost does still remain a significant issue. Whilst the ‘land grab’ in the master trust arena, and subsequent race to the bottom on cost, is starting to plateau, price is still one of the biggest drivers in selecting a master trust, and therefore in how master trusts are designed. 

At Smart Pension, we’re lucky that our purpose-built technology allows us more headroom to spend money on investments, which we believe will add significant value to members. Market pressure still restricts us (and others) from building investment portfolios that are optimal for members, though. Over time we do expect this to ease, as the pressure on value over cost continues and master trusts scale, but is likely to be a prolonged journey nonetheless.

DC pension schemes in general, and particularly master trusts, have been scrambling to find ways of engaging members. The difficulty is that individuals find it difficult to plan for something which they perceive to be so far off. This is particularly true given the competing demands on someone’s time and money in the present day, and also the ever-changing political landscape, which always threatens to reduce the attraction of long-term saving.

Our own research shows that the industry is failing in the most basic of tasks – helping individuals understand (a) that they have a pension, and (b) where that money goes once it’s taken out of their payslip at the end of the month. Over the past few years we’ve been constantly trialling new ways of engaging, through regular trials and pilots with members. One way that we’ve found of getting individuals to engage is giving them something tangible to hook onto, and get them to buy into a vision. For example, investing in affordable housing for society’s most vulnerable, funding new vaccine research or restoring wetlands are really tangible ways of showing members why pensions matter. Whilst those aren’t necessarily purely the remit of private markets – and we believe that impact can be made through the public markets –  private markets provide a significant opportunity to invest in these opportunities and showcase real value creation, on top of driving member outcomes.

We’ve found our allocation to private markets has been a great help in providing case studies for our members, showing them the true power of their money in funding great businesses.

In summary, there are a significant number of opportunities for master trusts in private markets, but also a number of barriers which might stop us getting there. At Smart Pension, we’ll continue to chip away at those barriers so that we can engage members as we invest their savings, helping build a world they want to retire into and making sure they have enough money to do so.  

Interested in finding out more - watch the full session here.