Partners Group: Change in mindset needed to unlock DC capital

The UK government has called on its institutional investors to allocate more capital to long-term, illiquid assets as it looks to address regulatory barriers to investing in private markets.

As the UK looks to reform rules around allocations of pension plans and retail investors into illiquid assets, defined contribution pension schemes need to change the way they think about private markets, according to Joanna Asfour, Partners Group managing director and global head of consultant relations.

Partners Group - Joanna Asfour
Asfour: meaningful changes to flows won’t happen until 2022

“It’s mindset-shift that’s now needed,” Asfour told Private Equity International. “There needs to be a greater focus on long-term value over a focus on cost. In recent years, particularly after auto enrolment in 2012, there was a race to the bottom on pricing driven by the charge cap regime.

“It’s going to take various stakeholders, master trusts, investment consultants, asset managers, the whole industry to start to report on value and not just report on costs.”

DC schemes are constrained by a 0.75 percent charge cap on assets under management and administration – an annual amount charged to savers that applies to all scheme administration and investment charges. This has acted as a barrier to accessing certain asset classes which charge a performance fee, including private equity, growth equity and venture capital, according to a consultation paper published by the Department of Work and Pensions in June.

In a letter to the investment industry early this month, prime minister Boris Johnson and chancellor of the exchequer Rishi Sunak urged UK institutional investors to “seize the moment” and “unlock the hundreds of billions of pounds” to drive the UK’s post-pandemic recovery. The letter noted that UK institutional investors – unlike pensions in Canada and Australia – are underrepresented in owning domestic assets, with over 80 percent of UK defined contribution pension funds’ investments mostly in listed securities, which only represent 20 percent of UK assets.

The pair also wrote that the government was “doing everything possible” to remove obstacles for long-term, illiquid investments. This includes reforming the cap on fees that DC schemes can charge members as well as the launch of the Long-Term Asset Fund, which could allow pension savers to invest efficiently in illiquid assets, by the end of the year.

The National Employment Savings Trust (Nest) has been steadily increasing its investment into private markets, starting with private credit in 2019, and plans to commit about £1 billion ($1.37 billion; €1.17 billion) or more into growth private equity later this year, PEI reported in June.

“Opening up private markets for long-term investors like pension schemes is a win-win,” said Nest chief investment officer Mark Fawcett. “It allows schemes to access potentially strong, steady returns for decades, while helping to support economic growth and job creation that should ultimately also benefit our savers.”

“We support the government looking at innovative ways to help other schemes access similar return opportunities,” Fawcett said in the statement.

According to a survey commissioned by the Department for Work and Pensions, two-thirds of DC schemes in the UK do not invest in illiquid assets, while the remaining one-third invest between 1.5 percent and 7 percent. Regulatory and operational complexities have prevented widespread uptake, although firms including Partners Group and Pantheon have been making moves in the DC arena.

Partners Group launched a product in 2016 in the UK called The Generations Fund, an open-ended commingled vehicle that provides institutional UK DC pension investors exposure to private equity, private debt, private infrastructure and private real estate investments.

Asfour said her firm is “eagerly waiting” for the LTAF guidance to be official, after which Partners Group could look into creating separately managed accounts for master trusts or a cluster of DC single-employer pension schemes. For example, master trusts might want specific ESG reporting on carbon disclosures, or bespoke solutions with access to certain private markets strategies, she said.

Beginning 1 October, DC pension schemes will be asked to report net return on investment, after deductions of charges and transaction costs, and not simply whether they are compliant with charge cap requirements, Asfour noted. She added that seeing that “value for money” is also tied into the push for greater consolidation in the DC market, especially for pensions with less than £100 million in assets.

“We’re monitoring how that broader consolidation of the market will happen and how they will think about accessing private markets,” Asfour said. “There will be an adoption period, but I don’t see meaningful changes to the flows until well into 2022.”

She expects that managers will spend the remainder of the year “looking into the rules and absorbing them and figuring out what their product propositions might look like. There’s the whole education piece and getting DC pensions comfortable with private markets.”