Defined contribution pensions are uniquely placed to lead a charge of revolutionising the financial system, according to a leading DC investment professional.
Speaking at the PLSA Investment Conference in Edinburgh, Nico Aspinall, chief investment officer of the People’s Pension, said the DC pensions sector is well-placed to "be at the heart of the disruption of the financial services system".
The People’s Pension, which is provided by B&CE, has four million members, 85,000 employers and £6bn of assets.
DC pension schemes in the UK are facing new regulations that will require them to disclose their policies on all material financial factors, including ESG – and specifically climate change. DC schemes will be obliged to put these into their statements of investment principles and make them available online. Eventually, the wider savings industry is expected to have to do the same.
Mr Aspinall said: "We are in the right place at the right time. The questions are: 'how do we get enough scale into DC to get the costs down?', 'how do we get the right data on the E, the S and the G such that we can do the tilt, such that we have a proper integrated factor portfolio, such that was can access the hyper volatilities of listed asset classes, and access unlisted investments in the right way.
"That’s a pretty compelling package to where the industry was five or 10 years ago."
Last month the Department for Work and Pensions revealed it is considering how to direct some of the money held in DC pension schemes into alternative illiquid investments to boost the UK economy.
In a 45-page consultation, pensions minister Guy Opperman, asked the pension industry to consider how DC assets could be channelled into sectors such as housing, green energy and small and medium-sized businesses.
Mr Aspinall said the big challenge was what the DC sector can learn from defined benefit pension sector, "in terms of accessing the economy", and "what we can do better than DB".
He said: "Necessity is the mother of invention. Our necessity is being low budget and because we’ve got a different time horizon, ESG investing. Our contribution can be to innovate in those spaces and get ahead of the curve.
"Whether DB in a mass sense will still be around by the time we solve those problems, or whether it can participate in those solutions, I don’t know. But clearly we look more like a retail market and what we are doing for 10 to 15 basis points, every retail investor in the world should be biting our hands off for."
Emma Douglas, head of defined contribution at Legal & General Investment Management, the UK’s largest DC asset manager with £75bn of assets, said LGIM was looking to extend "climate tilts" into other asset classes, not just equities and corporate bonds.
"It gets harder with emerging markets and government bonds but I can see a lot of progress in that area. That’s an area that catches members’ imagination too."
But she also told delegates in Edinburgh that for DC schemes to invest in venture capital was "challenging" because venture capital had high fees and performance fees, it is illiquid and it’s high risk. She said it was only appropriate if it enables managers to deliver better returns to members.
She pointed out that DC funds can invest in listed private equity funds and REITS rather than property. "But trying to do that within 13 basis point fee is challenging," she added.
Ms Dougles also highlighted risk that property funds may have to "gate" again - close themselves to redemptions - on or after March 29 when Britain is scheduled to leave the EU.
That is particularly challenging for DC schemes’ self selectors, she said.
Mark Jaffray, head of DC consulting at consultancy Hymans Robertson, which advises on £10bn of DC assets. "It’s a difficult ask to allocate 5 per cent of your default fund to private markets when that puts up your fee to the member from 30 basis points to 40 basis points. Meaning they see a one-third increase in their fee just because of a 5 per cent allocation to private markets."
Mr Aspinall said it was unlikely that on its own the DC sector had enough clout to persuade venture capitalists to lower their fees.
He said: "We can’t come along with £10m and demand reform of their market. When will we reach tipping point where we can say your costs have to change."
Mr Aspinall added that by illiquid he meant unlisted. He said: "We should not delude ourselves that listed investments are always liquid. We need to be cautious around that."
Speaking about investing in venture capital, Ms Douglas said: "I have never had experience of a scheme where a member has asked for it. I don’t think there is a groundswell of member demand. It is not coming from the members. Have to be doing because it’ll get better outcomes for members."
Ian Fraser is a freelance journalist
