Larger UK defined contribution (DC) pension schemes could invest between £30bn and £90bn in UK private markets over time, according to research from People’s Pension and Invesco, which argues that scale must be accompanied by stronger investment capabilities and governance.
The report, Built to grow: How asset ownership can improve outcomes and help the UK economy, models the potential benefits of UK pension schemes adopting elements of the investment and governance approaches used by Canada’s ‘Maple 8’ funds and Australia’s superannuation sector.
It estimates that wider adoption of asset ownership capabilities across the DC market could also increase annual UK GDP by between £75bn and £110bn.
However, the report argues that consolidation alone will not deliver these benefits. Pension funds must decide which investment decisions to retain internally and where external managers can offer greater expertise, access or cost efficiencies.
“Asset ownership matters, and also it’s never been more important in the UK than it is right now,” Dan Mikulskis, chief investment officer at People’s Pension, told IPE, pointing to the growth and consolidation of the DC market.
The research identifies around £25bn in assets as a potential starting point at which the benefits of scale become increasingly meaningful. However, larger schemes must also develop the governance, expertise and decision-making structures needed to use their assets effectively.
The report estimates that schemes with the right capabilities could achieve an annual asset ownership premium of between 0.25% and 0.75%, through more efficient investment implementation, lower costs, improved stewardship and access to a broader range of investment opportunities.
Hybrid approach
The report argues that pension funds should move beyond treating insourcing and outsourcing as an either-or choice.
Instead, a hybrid approach would allow schemes to retain control over strategic asset allocation and other key decisions while using external managers for activities where they have a comparative advantage.
Mikulskis described the central question as: “What decisions do we want to own internally and what do we want to use managers for?”
Strategic decisions, such as allocating investments between regions and asset classes, could remain with the pension scheme, while security-level decisions, dealing and order management, could be outsourced, he explained.
Asset ownership matters, and also it’s never been more important in the UK than it is right now
This approach could give schemes greater control over their overall investment strategy without requiring them to build every capability in-house.
Passive global equities provide one example of where external management may make more sense. “It’d be quite hard to see how we could have a comparative advantage in doing that internally,” Mikulskis said.
Building in-house teams can also create challenges around recruiting and retaining specialist staff, succession planning and key-person risk. Mikulskis said these risks can emerge quickly when schemes bring asset management inside.
The choice of model should therefore depend on a scheme’s objectives, existing capabilities and the areas in which it can add the most value for members, rather than an assumption that growth should automatically lead to greater insourcing.
Member outcomes first
The research comes as policymakers seek to improve retirement outcomes while mobilising more long-term capital for UK infrastructure, housing, innovation and business growth.
The UK pension system manages approximately £2.3trn in assets but remains more fragmented than those of international peers such as Canada and Australia. Consolidation, the Value for Money framework and Mansion House measures are among the initiatives intended to encourage schemes to make more effective use of their scale.
However, the report’s contributors stressed that supporting UK investment must not take precedence over pension savers’ interests.
Mikulskis said pension funds need clear return thresholds against which to assess UK opportunities, taking account of the alternatives available in global markets.
“You want to have the global option at your disposal. You just want to have all the options, really,” Mikulskis said.
The report argues that schemes need the investment knowledge and governance to compare opportunities on their merits, rather than allocate to UK assets simply to meet a policy objective.
It also highlights the potential for partnerships between asset owners and external managers to evolve beyond traditional product-led relationships, with managers contributing research, advice, operational expertise and access to investment opportunities.
The report calls on policymakers to support the development of the capabilities needed to make large-scale asset ownership effective, arguing that the benefits of consolidation will depend on how schemes use their scale, rather than size alone.
