Defined contribution investors now have sufficient clout in the investment market to push down management fees and force specialist managers to abandon performance fees, according to a senior executive at Nest.
Paul Todd, director of investment development and delivery at the government's workplace provider Nest, said the management fees for asset classes outside of bonds and equities could be expected to fall considerably in coming years, mirroring the falls already seen in index trackers over the past decade.
Mr Todd, who expects £500m a month to flow into Nest’s coffers from May after auto-enrolment contributions go up next month, said Nest is playing hardball when negotiating fees and charges with prospective asset management suppliers.
He cited a recent procurement exercise in the private credit mandate where Nest "made it very clear we would not be paying performance fees and we are constrained by the charge cap [. . .] but what we can offer in return is that we want to build relationships with fund managers and we can be with you for a long time and there’s a lot of money coming through. So that tend to be the quid pro quo."
He said this made for some difficult conversations, but once the fund management firm has recognised the merits of building a long-term relationship with a dominant DC player like Nest, and the volume of funds that would be likely to be coming through in future years, Mr Todd implied they were prepared to sacrifice performance fees.
He conceded that not all DC schemes are in a position to do that, but said their chances of doing so should increase as the DC market consolidates, along similar lines to what has happened in Australia.
There, IFM Investors, an asset management firm jointly owned by 27 not for profit Australian pension funds, charges average management fees of just 25 basis points.
Citing figures from Spence Johnson Todd he said DC assets in the UK were expected to go up by nearly 10 per cent per year and across retail and institutional should reach £871bn by 2026, up from about £480bn today.
"We are just in the process of getting into private markets for the first time," Mr Todd told delegates at the PLSA investment conference in Edinburgh.
"We are about to appoint some fund managers in private credit and infrastructure debt.
"Later this year we are looking for fund managers to move into infrastructure equity. We are also looking at venture capital and private credit and private equity, all the kinds of things you would traditionally see in large DB schemes. All of that is achievable in DC."
He said: "We drove some pretty keen deals on passive equities when we first started in 2012 but now they don’t look that keen if you see what’s happened to pricing certainly in the public market, it’s quite eye-watering. We expect to see a similar phenomenon in private markets going forward."