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."
Mr Todd added: "What Nest is doing today is much closer to what you see in Australia or other mature DC markets.
"There is more focus on real assets, a lot more expertise moving into illiquids. That is where over time we want to position Nest portfolios. We're not convinced cost and daily pricing evaluation will be big problems going forward.
"In Nest most of our members are in their 20s and 30s which means we are likely to be cash flow positive for another 30 or 40 years.
"We don’t have to worry about enormous amounts of assets flowing out through retirement."
He said this put Nest in a privileged position where it could afford to be more patient as investors to look for opportunities in more illiquid markets without having to worry about how we are going to be cashing out.
He added this presented fund managers with a huge opportunity to develop products that are suitable for DC.
Senior investment manager at State Street Global Advisors Mehvish Ayub highlighted the need for default DC schemes to have robust asset allocation.
"Diversification is not enough. There needs to be a consideration of as many of the tools that one could consider in order to protect yourself from significant market events," she said.
She added that evidence from across State Street was that ESG investing was "very additive to risk and return" but that "even if you don’t believe in any other argument for ESG, there is a flow of money argument, and that alone makes it a much more important topic that you cannot afford to ignore."
Ian Fraser is a freelance reporter for FTAdviser
