The National Employment Savings Trust would consider combining funds with competing workplace schemes to access alternative, illiquid asset classes, according to its chief investment officer Mark Fawcett.
Speaking to FTAdviser, Mr Fawcett said creating a collective, separately managed pool of funds could give schemes the scale to access expensive, actively managed asset classes such as infrastructure, direct property, private equity and hedge funds.
He said the emerging auto-enrolment (AE) funds are currently much too small to buy infrastructure assets on their own.
Nest, one of the biggest, has less than £900m in assets under management, while infrastrucure assets such as airports, roads, electricity networks and ports can cost upwards of £1bn. Even if Nest could afford one infrastructure asset, that would lock their money into an illiquid investment, making pension transfers and drawdown impossible.
But Mr Fawcett said pooled investment vehicles could solve this lack of scale. He cited the case of Australian superannuation funds, which have teamed up to create multi-billion dollar pooled investment vehicles, such as IFM Investors and QIC, that enable affordable access to valuable alternative assets, in particular infrastructure and property. Their many investments include Sydney’s Port Botany and the UK’s Manchester Airport.
“I think if we could all agree it was a mutually beneficial investment, why wouldn’t we?” Mr Fawcett said, adding that if competitors in the Australian market could collaborate, there was no reason why competing UK master trusts could not do the same thing.
“There’s a fight for market share [in Australia]. But at an investment level they are still prepared to collaborate, so I think they’re two different issues,” he stated, adding they were “absolutely not competing” with the big corporate defined contribution schemes.
He said a pooled investment vehicle for DC funds might also resemble the Pensions Infrastructure Platform, which gives defined benefit schemes pooled access to infrastructure assets.
“We had conversations with them [the PIP] but we couldn’t quite work out how to access it given our fast rate of growth,” explained Mr Fawcett. “Liquidity is not a problem for us in terms of getting money out; it’s getting money in.”
Currently Nest manages its asset allocation in-house - that is, it determines its overall exposure to asset classes such as domestic and global equities, fixed income, property, etc. - but makes no actual stock-picking decisions. However, Mr Fawcett said this is likely to change as the scheme grows, a move that could reduce fees paid to investment managers, and thereby save money for Nest’s three million members.
Mr Fawcett pointed to the Pension Protection Fund – the collective insurance fund for defined benefit schemes – which has recently hit £20bn in assets under management and has started to bring some investment management in house.
Graham Peacock, managing director of £50m auto-enrolment fund Salvus Trust, said he was “absolutely” open to collaborating with competitors. “If it was in members’ best interest, trustees would be duty-bound to do it,” he commented.
However, he admitted clubbing together was “unlikely to happen at the moment” as at this stage collaboration was more likely to be over standardisation of taxation, disclosure of investments and ease of transfers between schemes.
Mr Peacock said he would like to see Nest open its own investment options to other workplace schemes, so that other providers could benefit from its scale and the investment put into it by the Department for Work and Pensions.
He added expectations that auto-enrolment schemes may start merging to create “super schemes” in the near future, not just bigger ones “hoovering up” much smaller schemes – although Salvus is keen to acquire as many smaller workplace DC schemes as it can.
james.fernyhough@ft.com
