Why size matters when it comes to DC investment

Jonathan Stapleton
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Why size matters when it comes to DC investment

Jonathan Stapleton explains why the growing scale of DC providers is likely to herald rapid innovation in the market.

As the end of last month, Nest announced it has reached £10bn of assets under management (AuM) - putting it on course to become one of the largest players in the UK pensions market in a matter of years.

This sounds like a lot of money but when it is spread between each of the master trust's 8.6 million members, it equates to an average pot of £1,163 per person if distributed today - barely enough to buy each of them a bag of crisps a week at today's annuity rates.

Nest is growing fast - adding £400m in new contributions every month. And investment returns will (hopefully) be swelling member pots as well.

Other master trusts are seeing similar growth in assets as millions of newly auto-enrolled members are starting to build their pots.

Size does matter - bigger schemes are more easily able to access a broader range of investment strategies and improve their governance. Indeed, at the same time as announcing its AuM milestone, Nest also announced it had hired two external members to its investment committee - Jennie Austin and Jaap van Dam - both of whom have long track records in managing the investments of pension schemes.

The major trends in defined contribution (DC) investment - the changing approach to both ESG investment, an increase in private markets and infrastructure, and the increase of factor investing among others - all require significant expertise. Adding AuM can only help reduce the per member costs of such initiatives.

DC schemes have long been seen as a poor relation of defined benefit when it comes to investment strategy. The rapid growth of larger master trusts shows this will not be the case for much longer.

Jonathan Stapleton is editor of Professional Pensions

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