Private markets: what is the opportunity for the UK pensions industry?

Transcript

Louise Doherty: Hello and welcome back to the Thinking Forward podcast with myself, Louise Doherty, and Mike Ambery. Here we explore the trends and developments affecting the UK pension industry.

As you know, we love to share global insights on the podcast and as many of you will have seen on LinkedIn, Mike and I have been on our travels in the US researching the retirement income market. We've been to four cities, meeting with record keepers, providers, policy and media experts, and it has been absolutely fascinating.

So, I thought today we would start by asking Mike how jetlagged he is, because he's actually been to the States twice. I only had one set of jetlag. So, Mike, how are you feeling?

Mike Ambery: So first time of going away, I think it was absolutely fine. We didn't get enough sleep to actually have jetlag. Second time is absolutely true. So earning the money. I think in terms of jet itself, I, you know, question back to you. You had two hours sleep before we got to Chicago. I went to Barry's. Where did you go?

Louise Doherty: Where did I go? So I'd already been to Barry's five days in a row in three different cities. I think that is plenty. So… yeah. Mike, you went to Barry's and I went for brunch.

Mike Ambery: That's very true. And in terms of Barry's, did you take anything from Barry's, that you shouldn't have done.

Louise Doherty: That sounds much worse. But I might have come home with some lovely merchandise because, you know, I work in marketing and I love merchandise, but I might have also come home with a branded towel.

Mike Ambery: So if Barry's are on the look out, it is a great workout. We owe you a towel.

Louise Doherty: Yeah. Barry's Boston, thanks very much. They were great towels. But actually, back to what we did learn in the States, because we weren't there just to do Barry's. Although it did help with the jetlag because you're up at 4 a.m. anyway, so you might as well go to the gym and then start your day at seven and then do 5 or 6 meetings every day.

Reflecting back, what were your kind of key learns, kind of retirement income wise? What have you taken away from our trip?

Mike Ambery: So I'd probably say the folks over the pond are broadly similar to ourselves. And the main difference is it's a super mature market. So we sort of look at the UK market being, what, over 3 trillion pounds in assets under management across DB and DC for, sort of, final salary and money purchase schemes. Whereas over in the States it's more than 15 fold the size of that. So the market is, a lot bigger.

In terms of saving in private pensions, 50% of Americans have, 50% do not have. So what happens to those individuals that can't save and need to save? We talk about adequacy and needing to increase contributions from 8%. And probably in the States it's more about well, how do we do that?

Other things, I'd probably say the US audience is a little bit more educated and a little bit turned on. With, with our good friends here of Sam and Callum there, they would be turned on by investment chat. So I won't mention any more than just turning them on with that little tease.

Louise Doherty: I think we have to just temper that back a little bit, but there was a lot of talk about the markets, about stock trading, about, and someone that I'd met from one of the providers actually said she does educational sessions on trading for the kids at school.

Mike Ambery: Yes.

Louise Doherty: It's crazy. So different.

Mike Ambery: And it's such a different world over there. Which I think is a good thing. Things that we're probably going to talk about today as well. Private markets, you know, US doesn't necessarily have the speed of what we have right now. What's the transparency look like? What does daily dealing look like? So we might get onto some of that.

But other than that the market is very, very similar. And there's a lot to learn from the US as there was for, other holidays that I go on with work to Australia and otherwise.

Louise Doherty: You do love a holiday, Mike, although I don't think you enjoyed the temperature so much in America this time around.

Mike Ambery: No, -27 degrees, which we missed out on Des Moines, Iowa was actually, I think, colder than, one of the polar areas. So happily missed out on that. California, Hawaii, Miami, I'm available any time of year.

Louise Doherty: So to any pension experts in any of those places. Please get in touch. We will happily come and visit!

But, taking us back to the topic for today. So private markets, as you said, did come up when we were in the States and we know the listeners are keen to learn more. So on the last episode, we had Michela join us and gave, I would say, us a 101 on private markets, but she gave me a 101 in private markets. And then you also helped.

So why don't you remind the listeners what were the key things that I learned from Michela?

Mike Ambery: So I don't want to ruin it and stop people from rewatching the podcast if they've watched it or if, if they haven't, watching it. But what would I say?

I'd say, first off, what are private markets, how they come about, we talk about Mansion House, which other than being a building the other side of London from where we are right now, is how do we utilize assets in pension funds to invest in private markets to deliver better outcomes for members, which is probably the main points that I'll probably utilise.

The other areas which we will talk through today will be not every private asset is the same. Not every solution is the same in terms of transparency, cost, fee, what it does, how it's structured and equally what level of outcomes is, is delivered from that solution.

Louise Doherty: Okay. Well, talking about our guests today and the focus for today, it is private markets, but it's thinking more about what does it mean for pension savers. So it should really resonate with our audiences of EBCs, pension managers, trustees.

So I am delighted to have two guests join Mike and I today. Ehm, Sam, welcome. So you are a first time a joiner of the podcast. Why don't you tell the audience a little bit about yourself, where you work and what you do?

Sam Murphy: Great. Well, thank you very much. Thanks for having me. First time on, great to be here. So I'm Sam Murphy. I'm an investment director at Future Growth Capital, which is a joint venture between Phoenix Group and Schroders. I was at Schroders for ten years before joining FGC, and we launched in October.

Louise Doherty: Fabulous. Thank you for joining us. And we've got homegrown talent. We've got Callum joining us. He's actually just fresh back from paternity leave, so thank you first week back, coming, coming down and joining us on the pod. Same question to you. Just let listeners know a bit about what you do for us at Standard Life.

Callum Stewart: Thank you very much. Pleasure to be here. As always. And yeah, feeling fresh, despite a month of paternity leave, everything going well there. So I'm Callum Stewart, I'm Head of Investment Proposition at Standard Life, and my job is to, with our great team develop our investment solutions to provide great outcomes for savers over the longer term. 
And of course, private assets is one of the key areas where we see fantastic opportunity. So rest assured, we're doing lots in that space.

Louise Doherty: I can imagine! Okay, so to kick things off for today, I'm going to ask a few questions about Mansion House and what it means for our pension savers. Sam, I'll then come to you to learn a little bit more about Future Growth Capital. And Mike is then going to explore the solutions that are going to be available in the market, and I'm sure you'll be glad to hear, we're going to finish off with a crystal ball question.

So Callum, to you first, we talked a lot about Mansion House. Mansion House 2.0, Mike? Correct me if I'm wrong!

Mike Ambery: You can keep going. There'll probably be a third one too.

Louise Doherty: Okay. Ehm, but I guess what the listeners really want to know. We're thinking about private markets. What does this mean for pension savers? Can you break it down for us a bit?

Callum Stewart: Yeah. Great. So Mansion House, originally was a significant commitment amongst pension providers and other institutions in the UK. And that commitment was really towards improving outcomes for savers. Recognizing that through investment in private assets, good quality private assets opportunities, there was scope to improve retirement outcomes.

And of course, the other lens to this is, where does that capital get put to work? And I think from a government perspective and a policy perspective, in the UK it was seen that, well, if there's demand for private assets and investing in great opportunities, why shouldn't that be in the UK? Why shouldn't that support economic growth? So the genesis of Mansion House was a commitment to do both of those things.

Phoenix Group were one of the founding signatories of Mansion House compact. And the starting point, the 1.0, was a commitment to allocate 5% of default fund assets to private assets by 2030. But of course, time has moved on.

Louise Doherty: You talk about that for defaults. What does that mean, then, for pension savers in the UK? Is this something they should expect to be seeing?

Callum Stewart: Yeah, I think longer term I think, I really think private assets is going to be a permanent fixture when it comes to investing, particularly for default investment strategies, which will have the scale, already have the scale, but will have even greater scale over the longer term to deploy into more complex areas and take advantage of wider opportunities. So private assets will, we think, be a permanent fixture as part of that.

And it's grounded in science. You know, there's a wide investment opportunity set there. There's a track record over decades, of history, that demonstrate the potential for great returns. It's not a one size fits all. It's not a great return all of the time. It has to be managed really well, too. But if you combine those things, we've got a great opportunity to improve outcomes. So, we should see that as a permanent fixture. We should be providing better outcomes.

Louise Doherty: And thinking about those, like ourselves, who have signed up to the commitment. What are they doing versus those that haven't signed up to it?

Callum Stewart: So I think what we're seeing as a, as a general trend is those that did sign up to the Mansion House compact have already signalled their, their commitment and they're, you know, how they're going to deliver towards that 5% by 2030. Some have already taken action. Some are in the process of doing that. And fair to say, some are going bolder than others in that space as well.

For those that didn't sign up, well, I think inertia is starting to take hold. I think Mansion House has captured the imagination. I think private assets, for the reasons I've shared already, should be, you know, a serious consideration for any long term default strategy. So we're seeing the whole market kind of coalesce around that. And really, let's focus on how we solve some of the practical challenges around how we make that happen.

So yeah, we're seeing everyone really embrace private assets, but lots of different versions of what that should look like over the longer term.

Louise Doherty: Okay, thank you. I think that leads on actually to bring in Sam into the conversation. Future Growth Capital. Why don't you tell us a bit about the origins of what you're doing, why you're doing it?

Sam Murphy: Sure. So, Future Growth Capital has been created as the delivery mechanism for the commitments that Callum's explained that Phoenix Group have made. So once Phoenix Group committed to a significant portion of assets into private markets, the question is then how do you do that? And Phoenix Group, has created a joint venture with Schroders, which is very natural partnership. Schroders and Phoenix both have more than 200 years of experience in the UK market. Schroders has a big private markets business of about $100 billion. And Schroders also created the first long term asset fund, which we might come on to.

So a, a partnership between Phoenix and Schroders, which has come together really with a blank sheet of paper to design a business which can deliver the net outcomes for savers that Callum has mentioned. So that's really the genesis of Future Growth Capital.

Louise Doherty: Okay, thank you.

Mike Ambery: Before we go any further, Sam, you've got a face that looks familiar. Where do I recognize you from?

Sam Murphy: So you're fishing for Harry Potter five, six and seven? Is that where we’re going with this conversation?

Mike Ambery: That's exactly what I'm looking for. Please explain. Because, Callum and I've had colleagues before that have lived off such reality. Or, you know, actual movie, show experience.

Sam Murphy: Yeah. So before working in private markets for Future Growth Capital and delivering enhanced net outcomes for the good people of the British Isles. I was a Quidditch player, in Harry Potter.

Mike Ambery: Fantastic, man. Let's go to what you're famous for now, which is private markets, FGC and solutions. Could you give us a little bit more about what solutions are offered and to whom?

Sam Murphy: Yes. Of course. So, Future Growth Capital, as we've mentioned, has a really explicit focus on UK defined contribution investors. And ultimately FGC is the access point through which UK schemes can, gain access to the private markets around the world. And private markets, is a very kind of generic term for everything that is unlisted, that's private equity, venture capital, real assets like infrastructure and real estate, and private debt. So all together, 14 trillion market growing at about a trillion and a half dollars per year, which is very nuanced and complex, and global in nature.

And essentially FGC's role is to simplify all of that complexity and deliver to scheme members, a specific outcome which can enhance their returns. That's really what we do.

Mike Ambery: And it's absolutely what we want. Better outcomes for consumers, for customers, across the board. I guess the question is there, how is all that wrapped up nicely?
So, with Michela on one of the previous episodes, we talked through LTAFs. Could you run us through a, what an LTAF is again just for a reminder?

And then secondly, what the couple of varieties, on offer and how that delivers those better outcomes.

Sam Murphy: Yeah, of course. So private markets investing has been around for the last four decades or so. But it was really difficult for UK DC to get access, because the fund structures that were in existence were difficult to put on platform, were hard to put into default schemes. And so DC has historically been under allocated to private market.

So over the last few years the Treasury, the FCA, asset owners such as Standard Life, Asset Managers have come together to create a fund regime which can solve some of those access problems. And the LTAF, the long term asset fund, is the solution through which the majority of DC schemes who are accessing private markets are making their investment.

And ultimately it provides you with a UK fund regime, regulated by the FCA, with some consistency around how you subscribe to the fund and how you redeem from the fund.
And ultimately it makes the process more efficient and it provides an overlay of additional governance that wasn't previously available to UK investors. So the LTAF has become the go to for UK DC schemes.

In terms of what's available in the market today, I'd put them in two different buckets. So on the one hand is single asset class, so maybe a real estate LTAF, or an infrastructure LTAF, or a venture capital LTAF, or there's a multi-asset solution. So a one stop shop with that outcome in mind, combining the different asset classes.

At Future Growth Capital we focus on the second of those, so multi-asset. And that's really because the investors we speak to have three purposes from accessing private markets. One is enhanced returns, two is diversification, and three is that they want some liquidity if they really need it.

And for us, enhanced returns is typically above public equities, which are about 8% or so per year. And we believe you can achieve double digits by having a multi asset portfolio with a narrower range of returns than you would do through just say private equity.

Two is diversification. And so more asset classes is better than fewer.

And the third is on liquidity. And by having certain asset classes that produce cash flow like private debt, you're able to more easily provide the certainty that investors need, that if they do need to redeem some units, they are able to do that and change their investment strategy.
So, I think there's two different buckets and two different approaches in the market. And we very much see the multi-asset approaches that are a good first start for clients getting exposure to private markets.

Mike Ambery: That's perfect. And then in terms of those, there's two LTAFS available as well. Which are the UK based and global.

Like a good protein shake with its ingredients. When we talk of asset allocations, do you have a sort of good, good mixture component there that you'd sort of look at and what hits the market for FGC?

Sam Murphy: Yeah, of course, the first thing I would say is splitting out a UK exposure from a global exposure is very deliberate. So we know there's a lot of talk in the press and with government in terms of schemes, allocations to the UK. And different schemes will make decisions about how they reach an appropriate level, and it's up to schemes to decide what that level of appropriateness is.

So what we've done is very deliberately create two different structures to allow each scheme to decide on the mix that they need between the UK and the global side.

In terms of asset allocation, we're roughly 50:50 between private equity and real asset equity and private debt, and that includes corporate debt, but also debt backed by real assets. So things like infrastructure or things like real estate. So you have half the portfolio really providing you the excess return and then you're half the portfolio providing you cash flow, reducing the volatility and the range of outcomes.

But, in addition, to those more defensive, attributes, still being able to deliver equity like returns from the debt component.

Mike Ambery: Fantastic. So, you know, we love a comparison here. And, Callum and I obviously make comparisons between Australia and UK. I think the government has done it between, Australia, Canada and the UK most recently, which is probably the areas that I think Treasury look at to say, well, let's look at private assets. Part of the reason behind Mansion House and part of the economic growth that we have in the UK.

I guess you sort of propose it should be 8% plus double digit sort of returns, which is what you get in Australia. It's across the market it's about 10% in the last year. What should we expect? Should we expect better outcomes, from this? And as a market leading solution, would you, would you, would you nail things on double digits?

Sam Murphy: I think a well balanced private market portfolio through the cycle can generate double digit returns. Callum mentioned earlier that there's four decades of, of track record across these asset classes which have delivered those, those kind of returns. So I definitely think they're, I definitely think they're achievable over the long term.

Mike Ambery: Awesome. Thank you, Callum, I'm going to come to you. And we spoke about Mansion House before and the commitment there to 5% of DC funds being allocated towards private markets. Obviously I'm hearing what Sam says there, and I think if 5% if we could get more return, should I do that.

You coined a phrase which a lot of people haven't paid you back for trademarking of ten, ten, ten.

Callum Stewart: Ah yes. Yeah.

Mike Ambery: Do you want to explain what that means?

Callum Stewart: Yeah. So this was like, the whole, the whole premise of allocating to, to private assets to, you know, from a defined benefit perspective or a local government pension scheme perspective. This is bread and butter, frankly, to many, many of those larger schemes.

Let's be honest, from a defined contribution perspective, it is newer. We need to build comfort and understanding around that. Ten, ten, ten was aimed at bridging the gap there. And it's grounded in science. It's grounded in outcomes analysis, which is crucial to answering some of the key questions around what we should or shouldn't do here.

So what it stands for is ten extra basis points in terms of charges that the member should pay, could potentially fund a 10% allocation to private assets of the kind that Sam describes. Which the analysis was showing could improve retirement outcomes by 10% or more.

Fast forward to today. The modern research shows that if we take a young auto enrolment saver, say a 22 year old, where we've already understood and through yourself, colleagues and Phoenix group, the adequacy gap that we need to solve for is significant. We need to do that through increasing the auto enrolment contributions. But we also need to boost investment growth. And we think if we do both of those things for a young auto enrolment saver, we can double their retirement outcome.

Now that's significant. That's a huge milestone to achieve. So ten, ten, ten was a starting point. It was to bridge the link between ten basis points just, which is 0.1% in terms of charges, and improving retirement outcomes by 10% or more. But fast forward to today. We're not talking about tens. We're talking about really moving the dial and doubling the retirement outcome alongside the longer term support for increasing auto enrolment contributions.

Mike Ambery: So I won't be as cynical as to say Mansion House at 5% is really rather conservative if the opportunities for investment sort of come through for investors. We often lie awake late at night and have a conversation by 7 p.m. I'm talking there to talk through what does this solutions look like?

We look at Australia. You spent a lot of time in Australia looking at, a lot of the supers. They're investing at 40, 45%, and delivering, as we said, double digit plus plus returns. Where do you think the markets solution is going to in the UK? Is it you know, 5% felt an easy signature on Mansion House. Should we be pushing the boundary for more and over what pace?

Callum Stewart: So, in short, yes. I think as an industry we need to be much bolder. I think if we have conviction that this is the right thing to do, for all the reasons you've set out, and Sam as well, that we think there's a great return opportunity with the right quality of management around it, that we can access. So that's another point. How do we access? We should be looking to maximize retirement outcomes for people. What that looks like will be different, across the spectrum of providers that are looking at this problem. But I think it's fair to say that materially higher than 5% is where we should end up.

The reality constraint we have, today is unfortunately, we're not generally speaking, dealing with clean, single, fresh solutions, where we can evolve those to target the best possible outcome and pass on that better outcome to everyone that's invested in it. In reality, institutions such as ourselves at Standard Life and part of Phoenix Group, we've got a whole range of investment solutions that have been launched over time, to support different needs. And, you know, we need to make sure we bring as many of those savers on the journey as well. And that's no easy task. Because you've got, you know, products that were written decades ago, the terms and conditions we need to navigate appropriately. And that's challenging. We're doing it, but it takes time.

So over what pace? I think 5% by 2030 is a really low bar. I think to Lou's questions earlier. I think some of the direction we're seeing in the market suggests that 5% is too low as a, as an ambition.

So I'd expect most of the market to hit 5% way before 2030. I think, you know, I'd rather an unconstrained view on what that upper allocation could be. But my hope is that as an industry, we sort of coalesce around best outcomes, being the driver of the allocation.

Mike Ambery: And that makes absolute sense to me. I guess we warmly working with regulators in the space and Treasury and otherwise that are helping us with measures such as consumer duty and equally clarity and legislation, which helps us get there and take advantage of the situation. If I paraphrase, I think it's, make the right decision at the right time and bring a market that's probably used to lower charges to an outcomes focus over time. Lou, have you got a crystal ball on you?

Louise Doherty: I definitely do, always. Ehm, chaps, same question to both of you. Our crystal ball question. I'm hearing a lot of legislative change. There's a lot of focus on, on private markets and what using a, private markets can do for the pension saver, but also for the economy.

What kind of, what are the other positives that we see coming out of it that these two groups, so our UK economy and our pension savers, can expect to see?
Callum, I'll come to you first.

Callum Stewart: So I think the government's message around this, around the time for the original Mansion House compact, was that if UK pension funds can invest at scale, in the UK economy, that should be good over the longer term for jobs, will place less of a burden on the taxpayer as well. So good in terms of long term prosperity for people within the country.

Now, how that policy is taken forward, what that actually looks like, remains to be seen. And I think a crystal ball will need to reflect the fact that, you know, we have a five yearly cycle and a political regime can sometimes change over that period. We're talking about long term investment. So it really requires support across the chambers, to see those benefits come, come through.

I think for us, our primary responsibility is that outcome story. But I think, you know, we've got some real world challenges to solve here as well. And provided it contributes towards some of the great return objectives that Sam signalled earlier, I think we can invest in a way that supports those as well. Like, for example, investing in renewable sectors to support the innovation in technology, the research in terms of life sciences and technology there as well. So I think there are great investment opportunities to boost outcomes, but also real world opportunities to boost the world, I suppose.

Louise Doherty: Sam, anything to add?

Sam Murphy: Yeah.

Louise Doherty: So looking in your crystal ball.

Sam Murphy: Yeah. No, I would echo that. I think, you know, if we look back from ten years time in the mid 2030s, what can happen through these initiatives is that UK businesses, UK infrastructure, say the UK housing crisis can be addressed by the 3 trillion of assets that Mike mentioned earlier. And that will help drive outcomes for members, which is the number one most important thing. But as a secondary benefit, the UK should be in a stronger position.

That means more businesses growing more quickly, hiring more people, paying more into their pension schemes. And that's a virtuous circle, which I think benefits all stakeholders.

So, yeah, I think there's a lot to shout about in terms of the UK opportunity. This is the third biggest venture capital market in the UK. There are those opportunities in real assets. There are significant and deep opportunities in the UK. Great track record of investments in private markets in the UK.

So I think there's a great opportunity for everybody that's listening to this and everybody in the industry to really kind of play a role in, in driving that future that we want to create. Whilst at the same time balancing the UK aspect with a more global perspective to ultimately build the portfolios that create the, security that members need in retirement.

Louise Doherty: Thank you. Reflecting on what I've heard, it sounds like there are really some positive impact that we can have on outcomes for pension savers. And that is why we're all here.

Mike, have you got any reflections from what you heard from the guys today?

Mike Ambery: So say thank you, gents. It's really great to have you here. My takeaways would be pay more to get more. So potentially we're moving from the market of let's not look at the lowest price. If you pay a little bit more you might get greater returns.

So I was hearing sort of 8% plus as reasonable levels that we should expect. Secondly, like magazines back on the back in the day where you used to get a T-shirt attached to it, one size fits all is not a thing in private markets. There's very much different variations of what those look like. And Sam, you really explained what the underlying asset contents should look like to deliver those outcomes and returns.

And then thirdly, on Callum, where you referenced is 5% enough and how we’re going about this and at what pace? There's a few things to iron out to get there to make sure that consumers can take advantage. But we're doing that as quickly as we can. And actually 5% is a commitment we should be aiming to beat with better outcomes overall.

So, those are my three key takeaways. Other than he's a star on film. Crystal ball isn’t a word. And you can do Barry's all over the globe.

Louise Doherty: And indeed you can, indeed. And if any of our listeners have been extras or key players in any films, please let us know because we would like you on the pod.

Thank you guys so much for joining us today, and I hope you've enjoyed it as much as we have, and I'm sure the listeners will have enjoyed it as well.

As always, you can catch up on previous interviews and podcasts on our website. Just search Standard Life Thinking Forward and as always, please let us know if there are other topics you'd like us to cover, or if you'd like to come and join us on a future episode. Thank you.