TPT’s quest to support UK DB pension schemes

Consolidation among UK pension schemes has been building for over a decade, but the trend has accelerated significantly in recent years due to regulatory changes, cost pressures and the Mansion House reform agenda – the UK government’s initiative to unlock pension fund investment into the domestic economy.

The reforms encourage smaller schemes to merge or pool resources, to build the capacity to invest in a wider array of assets, including infrastructure and private equity, which can lead to improved returns.

In response to this growing trend, TPT Retirement Solutions, one of the UK’s largest consolidators of pension schemes, established TPT Investment Management (TPTIM) in 2023. The aim was to enhance its investment offerings for small to mid-sized UK pension schemes, providing them with access to a broader range of investment opportunities, particularly alternative assets, and to offer standalone fiduciary management services.

TPT Retirement Solutions itself was founded in 1946 as the Social Workers Pension Fund. It was created by the National Council for Voluntary Organisations, an umbrella body for third-sector organisations, to cater for social workers that were not eligible for public pensions. In 1987, it changed its name to The Pensions Trust and was known as such until October 2016. It is owned by Verity Trustees, a professional trustee organisation.

The establishment of TPT Investment Management marks TPT’s latest evolution, from an in-house pension scheme to a multi-employer scheme and, ultimately, a master trust.

The organisation currently offers clients three different delegation models of defined benefit (DB) pension scheme management. TPT can take on all the governance duties, including trusteeship, it can take governance duties when clients want to retain the trusteeship, or it can act as a fiduciary manager.

The 12-strong investment team manages £7bn (€8.5bn) in assets for 66 DB clients and is led by Peter Smith.

Smith joined TPT in 2008 as an investment analyst and held various roles until the inception of TPT Investment Management, where he joined as head of investment and was later appointed investment director.

Smith explains that this offering leverages TPT’s in-house capabilities, bringing them to the market to benefit smaller schemes, which typically lack access to certain investment strategies due to scale, cost, or complexity. 

He notes that the engagement with new consultants and schemes following the launch of TPT’s investment arm has been “interesting”, as fiduciary management remains a “fairly new concept” in the UK.

Thinking like an asset owner

According to Smith, conversations primarily focus on what TPTIM offers the market, but its ownership model truly distinguishes it from competitors.

He explains that TPTIM’s ownership by a pension scheme is “very unique”, as it fosters “greater alignment” with its clients. “We still think like an asset owner,” he says.

Smith identifies TPTIM’s approach to consolidation as another differentiating factor.

He explains that TPT, as its largest client, has seeded a range of investment funds that TPTIM now offers to small and mid-sized schemes.

Smith adds that certain asset classes in which TPTIM invests on behalf of its clients, such as infrastructure or private credit, are often difficult for smaller schemes to access.

Last year, TPTIM announced the launch of seven alternative funds for its clients.

He says: “We started with the more complex asset classes first. We started with Secure Income Fund and Real Assets Fund, which is predominantly infrastructure. What we would like to do is get [small schemes] to access these investments sooner rather than later.”

Then, Smith says TPTIM moved to more liquid asset classes, launching a liquid alternatives fund, an investment grade bond fund and a global opportunity fund.

The latest fund, focused on global equities, is due to be launched in the second half of this year.

Smith says: “We wanted to make sure these funds had scale on day one. That’s where our parent has effectively seeded funds. For example, the real assets fund had around £700m at launch, so small clients can get access to a diverse portfolio of illiquid assets on day one.”

The launch of these funds, and the growing relationships with external schemes, do not diminish TPT’s activities with its external managers.

Smith explains that TPT employs external managers to implement the funds, allowing it to focus on assisting schemes in achieving their funding objectives.

He adds that while this approach is unlikely to change soon, TPT may explore more targeted investments or co-investments to balance the portfolio or supplement fund investments with individual ideas.

 

Bespokeness

Smith says TPT is “different from most pension schemes” when it comes to its asset allocation targets.

He adds: “If you talk to a single sponsor scheme, they will have a single target asset allocation because they have a single funding objective.

“The way we set up the funds is to reflect our level of uniqueness historically where that brings benefits as much as fiduciary clients.”

Smith notes that all 66 of TPT’s schemes have different funding objectives, and the funds reflect this diversity.

He says: “We are trying to bring consolidation and a certain level of scale, but offering bespokeness for different schemes, recognising that every scheme might be different.”

Smith recognises that schemes have varying end-game options depending on their chosen TPT model. While buyout remains a common option, there’s increasing discussion on whether buyout or run-on strategies are more suitable.  

Currently, trustees are focused on refining data and reducing illiquidity in their portfolios, as schemes have progressed faster than anticipated, he says.

This process will take several years, he notes. “We are considering how we can help trustees plan for this, even if they are not there today.”

Smith says that TPT’s growth portfolio is balanced, with a 50-50 split between liquid and less liquid assets. He believes significant returns can be achieved in specialised markets like private credit, credit risk sharing, and real assets.

He adds that TPT has allocated to these markets over the past 15 years to diversify away from public equity, primarily driven by a shift towards real assets following the 2008 global financial crisis.

“It’s not that we are against public equity, but rather that our portfolio development has focused on other areas”, says Smith.

However, he notes that while TPT has diversified away from public equity, the asset class “will always be our single largest exposure” due to its attractive liquidity profile.

“We’re not trying to place our bets on a certain outcome, be it economically or politically. What we will clearly always do is try and respond quickly when things do move.”

Peter Smith, TPT 

While the government’s productive finance agenda could potentially influence this, Smith emphasises that TPT does not have a UK bias. “We generally think globally when developing our strategic asset allocation,” he says.

The way the portfolio is constructed varies based on the scheme’s current situation and its preferred outcome.

He points out that schemes moving closer to buyout often favour “matching-plus” liability-driven investment (LDI) solutions. These schemes, which generally benefit from a relatively strong sponsor covenant, tend to target Gilt returns plus a spread, and their portfolio is allocated to growth assets and LDI assets with a 60-40 split.

Schemes that are fully funded, adds Smith, and either targeting buyout or choosing run-on and surplus sharing, feature a similar allocation.

But TPT’s clients can choose a bespoke solution. “If a trustee has a particular investment belief, for example, if they don’t believe in hedge funds, we can accommodate that,” he comments.

Ready to act

When managing these portfolios, Smith notes that while active management can “pay off”, it is challenging, particularly in liquid markets. Therefore, TPT aims for a balance of 50% passive and 50% active management.

He adds: “We are only willing to pay for active management if we have a strong conviction but recognise that it is actually difficult to generate excess return.”

Due to its scale, TPT can access some more complex assets for lower fees. “One advantage is we can award large mandates, and we can get a fee reduction,” he says.

Smith notes there’s still a conversation to be had around what level of fees clients are willing to pay.

He says: “If you are a trustee and you do not believe in active management, and you want a low-cost liquid portfolio that is ultimately fine, but we think there is a reason in some circumstances to pay higher fees.”

Smith acknowledges that not everyone agrees, and it is “difficult sometimes to make that justification”. However, he argues that the net return TPT can achieve, even though it might be slightly more expensive than public markets, is what puts it at an advantage.

Regarding regulatory changes that could impact investment decisions or strategy, especially around the current government’s growth agenda, Smith explains that TPT has built its portfolio to be diversified in terms of both geography and return drivers.

He says: “We’re not trying to place our bets on a certain outcome, be it economically or politically. What we will clearly always do is try and respond quickly when things do move.”

He cites the Covid-19 pandemic as an example. TPT saw a ”huge sell-off” in the credit markets, which was impossible to predict, according to Smith. TPT considered the possibility of credit spreads widening and formulated a plan to access the market if it became attractive.

“We were able to deploy quite quickly and by April [2020] we upped our allocation quite significantly,” Smith says.

TPT is not trying to predict markets, but it wants to make sure it is ready for challenging conditions. “If market events do happen, how do we make sure we have the governance in place? How do we have portfolio impacts in place that we can move quickly? I think that’s the key around the governance and speed of action,” Smith says. 

This year, TPT’s primary focus is launching the global equity fund, but there are “no plans at the moment” for further fund launches, according to Smith.

However, he says that “if client demand brings about certain opportunities, if there are certain themes that start to emerge that trustees really want to address, we’re open to thinking about that.”

“This is our starting point, not the end point.”