Master trusts dominate DC market – with Martyn James, director of investments at now:pensions

[Music] Hi! Welcome to the Professional Investment Podcast. I'm Charlotte Moore, award-winning journalist and co-founder of Moore Square Communications. Each episode we welcome a guest to the show to share their new story of the week, and I'm delighted to welcome Martin James, Director of Investment at Now Pensions to the show. Welcome Martin. Thank you Charlotte, it's great to be on the show. Lovely to have you. Do tell us what is your new story of the week. So my new story of the week is from Professional Pensions from 17th March. It's that Master Trust dominates the DC market TPR data's data shows. And I guess this is not any great surprise. This is exactly what we'd expect to see happening, isn't it, with everything that's happening with the government pension bill and with how the market is maturing. But tell us, why did you choose that as your new story of the week? DC Scheme numbers are falling. They fell by about 15 percent last year and now they're all 790 DC Scheme's left in the market. And Master Trust now hold 92 percent of DC members. So the article really goes in and talks about consolidation in the DC market, particularly the single employer trust market consolidating into Master Trusts. But I wanted to expand that story and actually talk about the consolidation within Master Trust themselves. So of course over the last couple of years there have been a couple of prominent acquisitions in the markets and consolidation. And obviously one of those back in 2024 was the acquisition of Cardano and now pensions by Mercer. So myself and my colleagues at now pensions are living and breathing consolidation if you like. I wanted to give my perspective on that. So now we're at Mercer. Mercer obviously has a a Master Trust of their own, a successful Master Trust which is a little bit over 10 billion sterling in size and now pensions is a little over 7 billion. And also Mercer have other work place savings solutions such as GPPs which add to that scale as well. So once you add that all up we're becoming a sizable provider in the UK getting to the type of scale that the government wants and the kind of scale that really from an investment perspective becomes quite interesting. And so are you running that now pensions separately at the moment? Is all run as a separate business, separate investment strategy to the main Master Trust or are you aiming to kind of come closer together? Yeah, two Master Trusts separately. They do in different parts of the market, a different membership profile. So now pensions was introduced in 2012 for the auto and enrollment market for the effectively the unpensioned before that time. And Mercer is catering for the larger employers if you like. So very two different parts of the market, their Master Trust have different platforms. So we're operating very separately. But from an investment perspective, this is where we may try as we go into the future to combine scale to try and get better solutions for the membership combined. So something that's happened since the acquisition in 2024, the pensions schemes bill. One of those items in there is obviously the scale test, the requirement for there to be 25 billion of assets under management in a main scale default by 2030. Now clearly the size of now pensions at 7 billion, that would have been pretty difficult to achieve having stayed on our own. But there are now opportunities in the wider Mercer family to achieve that kind of scale by 2030. So that is a positive for us. But if I were to look at some of the other positives of the acquisition for now and how things might go into the future, is that now suddenly has access to the global business that is Mercer and the global investment business operating in most regions around the world. And particularly in the Master Trust space, we don't just operate Master Trust in the UK but other regions, including Australia, for example. So Mercer has a super down there. Obviously that market is a little bit more mature and we're learning lots from that market. So that's an advantage to have now pensions having that to learn across. But of course the investment business itself, investment professionals across the globe in different asset classes, but also that we manage money across the globe. And actually at the end of September last year, Mercer was managing $683 billion US dollars of assets for its clients. And so it's not just the the scale of the AUM in the UK, you master trust that now pensions can benefit from. It's that global scale as well, which is extremely important. But I didn't want to talk about the benefit necessarily just being to now pensions. I think there is a benefit to Mercer and the Mercer Master Trust as well. Yeah, I'm pretty proud about how now pensions manage its money. Now pensions was owned by Cardano, the fiduciary investment manager, who managed money at in-house. So it managed equities in-house, corporate bonds in-house, and other alternatives by the use of the riveted. And that's how it manages its money for now pensions. And the performance and how we've done over the last few years has been very beneficial. Now clearly Mercer purchased Cardano for a reason, that access to that investment capability. So we may see in the future that Mercer takes advantage of the way now pensions manage its master trust as well as the other way around. So we'll see how time progresses, but I think this could be a good new store in terms of consolidation for both master trust. Yeah, I mean, there's a quite interesting, you mentioned the number of assets that Mercer has on demand because we typically think of Mercer as a consultancy, but actually it's the kind of, it is an enormous asset manager on its own right as well. We forget that sometimes. So why didn't you talk to me about what you are doing that's innovative at the moment on the investment side at now that maybe Mercer has enabled you to do that you couldn't have done before, moving maybe into private assets that kind of, are you expanding the universe in that direction and how are you going about that? Yeah, but I mean, there is lots of just to introduce that. There's lots of discussion about whether scale is necessary in master trust to achieve good investment solutions. And we believe that we already have a proof point that scale matters and scale helps. So this is the private markets and the LTAF that we are just in the process of launching. So now pensions was looking at private markets investments before the acquisition by Mercer looking at partners in the market and we came up with a kind of straw man solution that we thought we could implement. Obviously with the acquisition by Mercer in 2024 we started talking about Mercer's plans and relatively quickly saw that it would be beneficial to combine the asset center manager with Mercer, leverage off Mercer's capabilities in private markets in terms of advice and in managing money it manages around 50 billion US dollars of private markets as well. And that would benefit now pensions. So what we've done is we've launched a bespoke LTAF which is run by Shrodas Capital, Shrodas Capital Vehicle and Mercer and now pensions will use that as the primary vehicle for private markets going forward to achieve the mansion house and core ambitions for example. Now that portfolio will invest about 50% in private equity assets, about 25% in infrastructure assets and the rest of the portfolio will be in more liquid listed assets and that portfolio will be targeting something like CPI plus 6% net of fees. So quite a high-octane return target. Now when we were looking at this portfolio on now pensions alone there was no way we could have targeted 50% in private equity. We don't know the exact number but it would have been something about half of that amount. So just by combining assets with Mercer, leveraging off their relationships we believe we've created a better portfolio a higher returning portfolio which will sit in our wider growth portfolio and will lead to better member outcomes over the longer term. Now obviously the proof will be in the pudding once we made the investments after a few years and we see the returns are but really just from setting this up we believe we've created a great solution alongside Mercer that would better than if we'd been going alone. So a bit of a proof point there on the scale. I mean it's interesting that you decided to go to the LTAF route because one would expect with greater consolidation and greater scale that you might have decided to go the segregated mandate route instead and you know done something Thanks so much. to what NERST has done and built, selected and managed for each of those asset classes and built the exposure that way. So could you talk to us about why you went the LTAF route? Yeah, absolutely. Just a point on the platform that now pension uses. So we use a custodial platform. We don't use a live company platform for implementing our investments. And that gives us great flexibility to build investment solutions. And when we were looking at the private market's question, we were pretty much agnostic to how we built that, whether it was a fund solution, whether it was a segregated mandate, as you suggested, because we had that flexibility. So when we were talking to managers, we were asking them how they would propose to help us. And actually, during that time, most of the managers were proposing that we had some kind of fund structure, actually to manage the commitments, the draw downs, the allocations and redemptions from the asset classes, effectively to operate the private market's portfolio. So it was likely that we were going to go down the fund route, although we didn't need an LTAF. Now, of course, as you know, LTAFs were created to allow DC investors to invest in private markets, particularly those on live platforms. Now, when we started talking to Mercer, they used the Aviva platform for operating their master trust. So they required an LTAF. So once we realized that the scale that I said before could create a better solution with Mercer, we're very pleased and happy to use the LTAF knowing that it would be better for our members to invest in that to get the scale. And I think this is an important point is that our trustees, whenever they're looking at the solutions that we're developing and proposing, in this case, the LTAF, they look at whether it's right for their members, the now pensions members. And they did challenge a lot on this, whether it was the right approach and came to the same conclusion that investing in the LTAF combined in the scale at Mercer was right for the now pensions members going forward. OK, so if that's one way that the consolidation has begun to help you expand your investment universe, what do you think the future is for both you and Mercer and now together and then for the wider industry as well? Because we're in this liminal phase where everybody's talking about consolidation, we've got some direction of travel through the pension scheme bills, but we're still waiting for the detail, a setter and to see how that will place out. And the market is already beginning to react to that, preemptively react to that legislation. So how do you see things developing over the next year to two or even three years? Yeah, so it's about working with Mercer and the colleagues becoming more one team to identify what's the best ways of implementing a DC scheme, a master trust and the default in particular. So Mercer will be looking at how we manage the assets and we're looking at how they manage the assets, are there better ways for either a membership? So that's an ongoing dialogue. It's not something that will be quick. There are complications to that. We started off with the delta from private markets because that's just what the two master trusts were looking to develop and launch at the same time like the rest of the industry. But we will look at other asset classes as well. And see whether it is advantageous to move to common investment strategies. Now, the scale test doesn't come into 2030, as we know. So we have some years to do this. We don't have to do it quickly. There's nothing that says that we need to get the scale in the near term. And as I say, we would only do it anyway. If the trust fees decided, it was the best, best, best room forward. I start from the position that I think that the scale can help is helped with the LTAF. Believe it could help with other asset classes. But we just need to test that as we go forward. So it's going to be an exciting few years in that. The one thing that I would say about this acquisition as well, I've talked about the benefits. And I really do think on the whole is the benefits. But this is a lot of work to do this. There's a lot of energy that's needed to investigate these and to work together another team. When there's so much else going on, as you mentioned, in the pension schemes bill and the otherwise, or just generally running a master trust. So our trust fees will be keeping us on the straight and narrow, making sure we do the right things day to day and throughout the year to make sure we're focused on the members. When I've spoken to colleagues in Australia, other schemes in Australia have been through a lot of consolidation. They will say that it's hard work. It takes a lot of energy. But when they've come out to the end of it 10 or 15 years later, generally say it was well worth it. The increased scale has led to better investment solutions and better for the memberships overall. So we'll go through all the conversations. We'll go through the hard work. We'll see what comes out at the end of it. But we go in there pretty optimistic. You have to have a strong stomach to go through a decade's worth of merger and acquisition. I have to say, because I was in investment banking in the '90s when it was all one bank merging with another. And I mean, that was just, it is painful, as you say, mushing together different cultures and different working practices. It takes time. So I mean, yeah, it's a lot of things. Yeah. So it may be-- It's a lot of things. Maybe the first 10 years is the worst. But that's a long time to be in that kind of much flux and turmoil. Yeah, I mean, some of the Australia supers, I mean, there's got one acquisition after another. And I really don't know if there's any more coming at Mercer. But there's probably more consolidation coming in the industry. We can probably expect to see this relatively small number of Mercer to get getting smaller. And there will end up in a place where there are the ones that are left. And then they can focus on the future and creating great investment strategies. So yeah, we'll focus on what we've got at the moment and making the best of it. And we'll see what the future lies within consolidation in the industry. So let's get to the meat of this podcast. It is called the Professional Investment Podcast, after all. I do tell us, you know, with all of that change that's happening, obviously, might have a few years of pain and betting down to go through. What are you excited about doing as an investment professional that you're in the future that you can't do right now? What's making you get through the pain, if you say what I mean, what's the investment carrot on the end of this tick? Well, I think, to some extent, for private markets, we've gone through quite a lot of the pain. It's been a lot of work over the last 12 to 18 months with my colleagues from Kadar, ex Kadar, no colleagues from Mercer to create the solution that we got. But it really is only the start now. We've got the plumbing in place. We've now got the vehicle that we can build upon. Now pensions is making its first commitment as at the end of this month. That will be drawn down. Some of that will be drawn down pretty quickly and will be making our first actual investments probably as soon as April and May. So this is investments in our private equity, portfolios and in our infrastructure portfolios. And just a bit on those mandates, because I think development of those mandates will be pretty exciting. In the private equity and infrastructure, there will be global mandates, diversified across sectors. But we're not really trying to tie the managers down into particular asset allocation to go where the opportunities are, as long as there is diversification there. So very excited to see what the opportunities are out there in the market. The managers know that this is the vehicle to achieve the Manchin House Accord Ambition. And obviously part of that ambition is to have at least 5% in the UK. By 2030. So they know that would like them to be investigating the UK pipeline as well. And we expect them to do that. But we're very clear about the fiduciary duty that UK assets will be-- have to stack up from a financial perspective and fit in the portfolio from a risk-perturbed perspective. But if they do, we'd love to see those assets in the portfolio. So our trustees, they have very strong sustainability beliefs. They want to see a real world impact from its investments. And that does happen in the listed equity portfolio as well. But you can see that coming even more in the private markets portfolio. So we have an infrastructure within the ELTAF. Some of that will be the energy transition infrastructure. So we'll see whether some of the UK assets can come in there into that infrastructure play. So I'm just very interested and excited to see how the portfolio builds. we're looking to get a fight. percent allocation to this health by the end of the year. And then we'll need to look at the success of that and the pacing to increase that over time to 10% for the Manchin House of Court and ambition. And I think what I've told you the allocation to that portfolio is only really started to 10. We need to see how that evolves. Obviously, there's going to be a lot of cash flow coming into to the now pensions master trust and master trust over time. We need to seek other opportunities and we'll look at other asset classes including venture, natural capital, real estate. Nothing will be off the table, but we have to focus on what's going to add the most value to members in the overall portfolio before deciding where to go. So there's lots of research on other areas as well. So although that's pretty exciting, I think the other parts of portfolio were in pretty good shape in the listed equity and how we manage that sustainably with the energy transition and some of the diversification that we have in other parts of portfolio. We've been performing pretty well against our peers with helps to an allocation to gold over the last couple of years. So I don't think there's anything major we need to do in the other parts of the growth portfolio. You mentioned the growth portfolio. Of course, the other bit of the pensions legislation, the interest in DC is, you know, requiring pension providers like yourself to give members a default retirement income. Have you started to think about how you're going to do that, how you're going to build that product suite, or I don't know if there will be a range of different products, a range of different options, and what the underlying investment opportunities are that's going to sit underneath that? We have. We're kind of partway through the discussions yet and haven't firmed up. But what I would say about now pensions is we're a little bit of a different beast from the Mercer Master Trust in terms of the membership profile here. So at the moment, our members coming up to retirement, and we've just done quite a lot of member analysis about this, still have very small pot sizes on average. They've only been saving since 2012 in AE, and even then a lot of our membership are part of time, quite transient workforce, et cetera. So for the majority of our members, they are and have been taking cash into their bank account at that retirement. So that will be the default for the majority of our members. And then we need to think about those members that might be less than 10% of our members. That have pot sizes that need something a little bit more sophisticated to deliver that regular income in retirement and for life. And we're trying to think of a way to cater for those members. Maybe there is an element of needing to comply with legislation by 2027 and then thinking about the longer term solutions. We're trying to think of it in two phases there. We've also got a joint working group with Mercer. As you can imagine, on this, they've got a different membership profile, as I mentioned. We've got a lot of members with larger pension pots and how they're thinking about that as well. So that's where the two masters trust a bit different. So we have to think about things in a different way, but try and join up in the intellectual capital and our thinking. But we haven't come to a final solution as yet. I mean, I'd sort of like, rough and ready rule of thumb, you would expect you to ratchet down, but not completely eradicate the more growthy end of the investment spectrum like equities, maybe, or even private equity, and then ratchet up the fixed income side. I think one of the things that's been interesting we talk about private assets. As you mentioned, infrastructure and private equity, and that's very much for the wealth building phase. But maybe you bring in other private assets along with fixed income style, classic fixed income style assets, in that phase, when you get to the point where you have to develop an actual income for people where pot sizes get big enough to make it worth that while that would be the sort of kind of thinking you're thinking about. And then obviously longevity risk is something that needs to be considered as well. Yeah, I think that's right. So what we talked about with the LTAF here is very much a growth portfolio at the moment. That's where the majority of our members and assets are, what's where the focus is. But already internally at Mercer generally started thinking about the private markets that could fit in later on in the glide path, in the run up to retirement and post retirement. So we deliberately not had asset classes such as private credit in the growth portfolio. Can be good investments there, but probably doesn't fit that return potential that I said of CPI plus six net, but would fit in more in the kind of through retirement solution. So there are other asset classes within infrastructure, but maybe different types of infrastructures in the growth portfolio, maybe real estate as well into that kind of portfolio. So start to think about that, but different solutions. But as I say, I think it's more my Mercer colleagues that will be more keen on this kind of solution in the near term, because they've got more of their members in this kind of in the need of regular income than our pensions. So we talked quite broadly about the investment opportunity you've excited about as we move through consolidation. We talked about the LTAF, we talked about how you're looking forward to seeing that portfolio build out and how we're, time may be thinking about natural capital and eventually over time you'll be might thinking about building some kind of retirement income. What does all of this sort of layered investment strategy over the short medium of the long term? What are the benefits for members? That's why you exist, right? You have a promise to pay members benefits. Well, promise to provide a default retirement income now. You have a promise at least to try and expand their pot as best as you can and to preserve that capital as they approach retirement. So what are the benefits from members from thinking in this more holistic investment way than we did say 10 years ago where it was just passive equities? Well, I think that what we've been trying to do in the growth portfolio as I mentioned before is try to increase the returns for members in a kind of risk controlled way and the private markets that we're going into is slightly different from some of the other LTAFs that have been introduced and going for the higher return. This is about creating better longer term outcomes for members and we believe that as we increase the allocations from maybe 5% to this to 10% and maybe beyond in the future that this will drive better returns for members and we'll see this coming through in the value for money exercises that we do in the future. Yes, we need to think about the two and through retirement piece as well in terms of providing an income through potentially draw down solutions, maybe the longevity protection, maybe looking at things such as CDC, everything will be on the table to make sure that we can go into that spending phase and think about the members outcomes as well. The one thing that I wanted to say about members with the types of investments that I've spoken about is that the private market piece, I think this is a real way to engage members on their investments as well. I spoke about the return and the risk aspects and the real world impact and it's that real world impact that I think could be really powerful. Before we talked about or looked at creating the LTAF with Mercer, we invested in the UK Affordable Housing Fund as well for now, we have about 1% allocation to that and that was with the kind of member in mind. That kind of portfolio invests in social housing, it invests in affordable rent and it's also a vested shared ownership and that really provides a social good. Provides in inflation linked returns as well and it has a decent return target but it's also there for that real world impact for members. We've only been invested since May last year but already our Afghan and modest investment has funded 265 homes and potentially that's 893 individuals homes through that investment. That's something I know that the trustees are proud about. We're thinking about now how to promote this to members to actually show that this is how your pension scheme money is being invested. For financial returns to get you good retirement outcomes but also for the social good that possibly you will improve your future as well. I think a lot of the investments that we do in the private market space, thinking about the energy transition in wind and solar will have the same impact. It's hard to do to engage members but there's a potential opportunity to do this so they can get more focus on their pension, more trust in it and potentially even increase savings into the future. Fantastic. I think that's a great place for us to end this podcast which is also the last episode of this series. We'll be back after Easter. Thank you Martin so much for sharing your new story of the week and all of those fascinating insights. great to have you on the show. Thank you very much for the opportunity to speak for you. And listeners, if you want to make sure that you never miss a future episode of the professional investment podcast, make sure you hit that subscribe button, do interact with us, take part in the poll if you're listening via Spotify, and thank you for listening. [BLANK_AUDIO]