Feature – Defined contribution
slumped by 9.5% while The People’s Pension’s Global Invest- ments fund lost more than 9% of its value. Other master trusts who are yet to report their figures for 2022 have acknowledged that it was a challenging year.
Alongside economic turbulence was a gilts sell-off in Septem- ber, as investors with liability-driven investment strategies sought to firm up their hedges. This especially impacted the retirement stage funds and annuities which paid out late last year.
Inflation has been an additional challenge, says Nest’s chief investment officer Mark Fawcett. “2022 was a difficult year for investors. The main drivers for these difficulties were higher inflation, higher interest rates and fears of recessions.” Joanna Sharples, chief investment officer for Aon’s DC team, acknowledges that this means schemes are now thinking about what changes they could make to their strategy. “It has been a bit of a shock that last year bonds were quite risky and that you need to think about your maturity. “Even within the index strategies, there have been better places to be. What you did with your currency made quite a difference and depending on the bond maturity in your indices, you could get a fall of more than 20% or positive returns. There has been a massive dispersion,” she adds.
Flexible friends
Another factor driving the trend to re-think investment strate- gies is the rapid growth of DC assets and the concentration of these assets among an increasingly smaller number of provid- ers. This trend has been accelerated by regulation, such as the rules for master trust authorisation in 2018. Since 2012, the number of DC schemes with more than 11 members has slumped by 67%. While master trusts do not yet hold the majority of the industry’s assets, they do have the largest mem- bership, according to The Pensions Regulator (TPR). In January, the 36 authorised master trusts invested more than £105bn on behalf of 23.7 million workers. Nest’s assets alone stand at £26.8bn, which belong to 11.7 million people. This growth in scale means that DC investors now have more flexi- bility to think beyond conventional assets and index strategies.
A prominent example is Nest launching two private equity mandates last year. For Aon’s master trust that means real estate and infrastructure strategies are being considered, Shar- ples says.
Regulatory drivers Regulators and policymakers have been keen to accelerate this trend, judging by the two latest DC consultations put forward by the Department for Work and Pensions. At the end of last year, the department closed a consultation on
22 | portfolio institutional | March 2023 | Issue 121
Broadening Investment Opportunities of Defined Contribu- tion Pension Schemes. In its introduction, then pensions min- ister Alex Burghardt did not mince his words: “Enabling our occupational schemes to take advantage of long-term illiquid investment is one of this government’s key priorities.” While the government changed rather swiftly, the agenda remains the same. The proposals are aimed at accelerating investments in illiquid assets and facilitating greater transpar- ency through so called “disclose and explain” standards, which would require schemes with more than £100m in assets to set out their allocation strategy. This was backed by most of those responding to the consultation. Another consultation, launched in January and due to close in March, looks specifically at the challenge to address the diver- gence in member outcomes through a value for money assess- ment. These proposals mark a significant move from the focus on costs in the early days of auto-enrolment. Instead, the con- sultation, put forward by the DWP in collaboration with the Financial Conduct Authority and TPR, proposes to assess investment performance alongside costs and charges and qual- ity of service.
In addition, Laura Trott, the new pensions minister, also pro- posed to widen the scope of exceptions from the charge cap, in another attempt to ease DC investors into illiquid assets. But Aon and Nest have said that the existing charge cap has not been an obstacle to invest in alternatives. While The People’s Pension welcomes the changes to the
It has been a bit of a shock that last year bonds were quite risky and that you need to think about your maturity.
Joanna Sharples, Aon
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