The entrance to BlackRock's London offices. Photo: Patrickistock via iStock
BlackRock has seen an $80bn (£60bn) shift from pooled funds to custom solutions among its UK pension clients over the past year.
Speaking to Professional Pensions, the asset manager's head of UK defined contribution (DC) platforms and retirement solutions Tim Hodgson said the trend – which he says is also happening more broadly across the market – came as clients were looking to take more control and be more precise in how they deliver their objectives.
He said the shift – largely among BlackRock's DC clients – meant, in some cases, moving from a pooled fund to a "fund of one" mandate; in other cases it was a "more structural thing" where the client wanted more control over the top-level wrapper, sometimes with a change in the scheme's sustainability objective.
Hodgson said this meant that, rather than BlackRock doing it all in a single wrapper that other clients could buy, it now created the same investment experience but in a different way – for instance providing asset allocation on an advisory basis, rather than within the fund wrapper itself.
But he said the building blocks remained the same.
Hodgson said: "The common theme is more control, and more precision, in delivering that pension client's objective."
Sustainability commitments
BlackRock said "the vast majority" of the £60bn shift over the past year had been around pension clients' sustainability objectives and how they could best deliver against the commitments they had made.
Hodgson noted sustainability commitments in DC have been evolving over the past ten years – with DC investors starting off by pivoting from a pure market cap index to some form of sustainable index equivalent and then committing to be net zero at the portfolio level.
And he noted that net-zero commitments varied also – with some clients pledging to be net zero by 2050, others looking to do it by 2040 and some by 2035.
Hodgson said that, as we approach 2030, pension investors were becoming more specific about how they continue on their sustainability journey and exactly what they want to achieve – be that related to carbon targets, natural capital or biodiversity.
He said: "We're now seeing individual pension clients being much more specific about what they want to achieve."
Hodgson said this was particularly the case when it came to exclusions – noting that, while many asset manager funds, including BlackRock's own sustainable fund range, had a fairly well-established group of exclusions, clients increasingly wanted to differentiate what they excluded.
He explained: "Some people want to exclude. Some people want to own and engage. This trend to customisation is a natural evolution of what it means to be sustainable and how much control people have over their own beliefs being implemented in their portfolios."
Finding a partner
Despite this desire for DC investors to shift to a more custom approach and take more control of their portfolios, Hodgson said this was something that was quite hard for a pension fund to do on their own.
He said: "You can come up with the beliefs, but how is that then represented in a portfolio? You need help as it really is quite difficult."
Hodgson cited the example of investors who make a sustainability decision to underweight a particular stock or sector and then see a reversal in the market, which leads to performance consequences.
It is for this reason Hodgson believes that DC investors need a partner to help them deliver precision in their sustainability objectives – analysing the companies in the portfolio, the effect that sustainability decisions will have on the return characteristics of that portfolio and then helping you to structure and move that portfolio.
At the same time, he said the pools of DC capital were getting larger – meaning that moving money was no longer a simple cash trade.
He said: "You need somebody with lots of sustainability research; you need a flexible platform, to help decide on the right structure; and then you need to be able to get it from A to B."
Hodgson added: "It is about people making sure they pick the right partner… Customization works if it's done well. If it's not done well, it can be expensive for the member and for the pension fund."
