Hugh Cutler, Chief Commercial Officer, Mobius.
The UK DC market is growing rapidly – auto-enrolment, the death of DB, pension freedoms, Master Trusts, consolidation. Between the trust, contract and SIPP market, we are rapidly approaching £1.5tn for over 30 million people.
Private markets growth
When I started in pensions 30 years ago, UK equities and gilts dominated, and diversification came from some overseas equities.
Today, with scale, the Mansion House accord, the ESG agenda and the search for diversification and returns, we are seeing a dizzying range of assets entering default solutions. We have already added securitised credit, synthetic and options strategies, private equity, private credit, real estate and infrastructure, and this year, we have added a carbon removal strategy and are working to add venture capital. We have some advisors and managers looking at BTC and tokenised assets are surely coming soon.
Decumulation
Meanwhile, there are now large cohorts of individuals and assets in drawdown – estimated to be over £200bn already but with the first generation of “DC-only” retirees coming soon (me included) this number is going to balloon.
These people are facing a complex job of working out how long they will live, what it will cost them to have an enjoyable retirement, or at least a dignified one, and how to manage the complex and under-appreciated sequencing and inflation risks. We don’t see many high-quality solutions, and even fewer that come at a reasonable cost. Using a wide range of sophisticated investment strategies – more akin to a DB run-on portfolio – is likely to be part of the answer.
Solving the operational challenges
There are a lot of complex investment challenges to consider for DC, as there are for DB, insurers and endowments. However, if you look under the hood of a UK DC pension, you’ll find some fundamental, mandatory operating constraints that just don’t apply for other investor types: daily valuations, daily cash flows, and fee caps. While you can just about imagine a DC scheme set up differently without these features, it is hard to see the industry pivoting now.
For decumulation, you need income paying solutions and an even wider range of asset strategies to keep volatility down and inflation-linkage up.
If the DC industry relies on individual investment managers to create products with these features, they will inevitably end up with restricted choices and sub-optimal products – expensive funds with cash drag and tax leakage from a narrow range of managers and strategies.
However, by using a flexible open architecture platform, they can access any type of fund/ strategy to enhance returns, diversification and risk management and gain economies of scale and efficiency. Leading institutional DC plans and forward-thinking Master Trusts are embracing this, but contract and retail pension providers are often still stuck with limited and inefficient retail fund ranges.
While this all sounds complex, a lot of it is just unfamiliar. When the industry leverages the experience that the leading players have already developed, we can build a much better retirement for millions of UK pensioners.