It was a significant day in February 2019 when Guy Opperman, the then-minister for pensions and financial inclusion, published a consultation paper on pension investment innovation with the focus on unlocking private market investments for defined contribution (DC) pension schemes in the UK.
The consultation - Investment Innovation and Future Consolidation - was the first of its kind and kicked off a series of others over the course of the next four years that progressively looked to tackle the barriers to long-term productive investments for the growing numbers (and pension pots) of auto-enrolled pension savers.
Prior to that, like many others, I had been concerned that DC schemes hadn't been investing in the real economy and instead had been fully reliant on the volatile whim of public markets.
Having started my career in private equity before moving into pensions, I had seen first-hand how well managed private investments could make a real difference to investment outcomes. And arguably no one needs more help with improving outcomes than auto-enrolled DC savers in the UK, with savings levels still being too low to put people on track for a comfortable retirement.
This means investment returns need to do a lot of heavy lifting, working hard to try to bridge the retirement gap of the savings people will need to retire on versus the savings they are likely to get.
Working on investment design for one of the UK's largest pension providers, I developed a longstanding interest in the crossover of DC investments and private markets. Now my career has come full circle and I'm back in private markets working for a pension fund-owned asset manager investing in what matters.
It almost goes without saying that this is an interesting time for pensions in the UK, with the Mansion House reforms trying to spark greater DC pension investment in private markets and the real economy. The focus of the reforms is a voluntary Mansion House Compact whereby nine large DC pension providers agreed to allocate 5% of their main default funds into unlisted equity by 2030.
There are those who have reservations about this, but I believe the UK government's support for private markets is a gift horse for the pensions industry and DC pension savers. The reforms should help default investment strategies to work harder, eking out more return over time per each pound of contribution. Instead of looking this gift horse in the mouth, it should be seen as an incredible opportunity.
The potential benefits of productive direct investments are many - from a strong potential for higher returns net of fees, and assets being less susceptible to market stress and volatility, to portfolio diversification benefits and direct inflation linkage for certain types of investments like infrastructure. These investments can also have a major sustainability impact.
Something truly profound can happen when DC savers' lifelong capital comes together with illiquid direct investments and creates long-term sustainable benefits both for pension savers and for communities around the world. We already see this in Australia, where most people are DC savers and the big Australian pension funds provide significant allocations to unlisted infrastructure.
This impact is immediate and long-lasting as it's delivered directly in the real economy. Investors, for example, don't have to persuade company management through rounds of engagement or try again and again to vote for the outcomes they'd like to see - they can just roll up their sleeves and get to work.
The opportunities for achieving sustainable outcomes while generating returns in private markets are far-reaching: funding specific projects in renewable energy generation or charging infrastructure, choosing company directors with desired diversity, equity, and inclusion (DEI) characteristics, directly influencing social issues related to communities and workforce, like health and safety, supporting nature-based solutions, or driving good-quality company disclosures by helping portfolio firms set up appropriate reporting.
Alignment and pooling
To make this a reality, there are two bits of advice I'd offer. Firstly, pension schemes need to ensure there is alignment in beliefs and purpose between them as long-term investors and their chosen asset managers because these sustainability benefits are most likely to materialise if such an alignment exists.
Secondly, the providers who have signed the Mansion House Compact could consider pooling their investments by setting up a shared resource to manage private market allocations and reduce costs. The government's own modelling says lower private equity fees are needed to make these proposed investments work in members' interests.
Perhaps the UK industry can learn from what's been created in Australia. As an example, IFM Investors was set up as a collective pension funds-owned manager and pension funds now enjoy substantial illiquid allocations and the returns that these can achieve. Such a model helped drive up scale, while driving down fees.
We should stop trying to find reasons why not to invest in private markets, and instead embrace the reforms set out by the government, and make the most of it for our beneficiaries and the communities in which we operate.
Maria Nazarova-Doyle is global head of sustainable investment at IFM Investors, a global asset manager owned by Australian pension funds