Illiquids in DC – now we are getting somewhere.

Now we are getting somewhere.

I’ve had my run ins with Mark Fawcett over the years. Either I’ve learned to understand him or he’s getting to grips with being CIO to Nest – or both.

I cast my mind back a few years to Chris Sier asking Mark Fawcett what he was paying his managers, Mark admitted that Nest’s Investment Management Agreements were under non-disclosure agreements. I thought this wrong then and I think it wrong now. And I hope that when Nest cuts this new bargain, it will make it clear what the bargain is.

Nest is in the process of repaying a huge amount of money borrowed from the taxpayer on preferential terms. Part of this loan is justified by Nest being not for profit and fulfilling a public service obligation.

It is in the public’s interest to access parts of the investment market which are currently “private” and to do so in a way that delivers its savers value for their money. In his interview with the FT’s Chris Flood, Mark Fawcett makes some bold and encouraging statements including the succinct

We won’t pay two and 20

“Two and 20” is the way that hedge funds extract value from their customers , taking 2% of the investment upfront and harvesting 20% of the profits (as determined by the hedge fund valuation process) along the way.

Fawcett is explicit in separating Nest’s capacity to take on the hedge-fund hegemony.

“The total level of fees levied by most private market funds will remain too high for many DC pension schemes to access,”

He’s right, and hedge fund managers aren’t going to drop their pants to any old scheme that thinks that Nest’s terms are available to any DC scheme. We need consolidation so that all DC schemes can compete with Nest and provide better outcomes to all DC workplace savers.

We also need Nest to raise the game elsewhere. The “ours by right” attitude of some parts of the wealth management industry needs to be challenged. While behemoths such as SJP might rival Nest for hedge fund manager’s terms, most Discretionary Fund Managers will not.

Advisers choosing to take money out of Nest and other super DC funds are going to need strong arguments if they are to pacify the FCA which is now openly arguing that Nest and People’s Pension and other large schemes be considered in the advisory process.

There are those in the investment management industry looking to take advantage of doors opened by Nest and others. I spoke last week with Darren Agomber, the outsourced CIO of Smart Pensions and CEO of Connected Asset Management.

Smart is not able to cut deals as Nest can, but we may see pooling of assets in funds that allow second tier master trusts getting access to private equity on pretty well equivalent terms. Connected Asset Management clearly think this is possible.

What is good – and new – and different, is that we have fund analytics businesses like ClearGlass and Byhiras that can look inside the charging structures and tell us whether what is displayed is what we get, or whether it’s more smoke and mirrors.

It is important that Nest now drop all these NDAs and “most favored nation” clauses .  It must be transparent – and not enter Faustian pacts with hedge-fund managers over fees. It should fulfill its public service obligation rather than exploit the advantage given it by the taxpayer.

In the absence of the EU (who have intervened on this in the past) , we need the DWP to be clear to Nest that any “bargain” is a bargain for all. Nest may get the best terms – by being there at the start – but that doesn’t mean savers in other workplace pensions, can’t benefit from the bargain.

I look forward to hearing more from workplace pensions on allocations to private markets. I would like to hear from People’s and  NOW and Lifesight and Legal and General in particular.

With more companies de-listing and using private markets to raise equity funding, with an increasing number of private deals to be done in the credit space and with the prospect of a Treasury backed infrastructure fund in the fourth quarter, it is time for this radical new bargain.

Let’s see if it will happen and let’s encourage small schemes to recognise their members need access to these kind of funds. We need to support the DWP’s consolidation agenda – if member outcomes are to improve.

How previous generations saw miserly behaviour

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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4 Responses to Illiquids in DC – now we are getting somewhere.

  1. Eugen N. says:

    When it comes to hedge funds and private equity, there is only one winner – the investment manager.

    There is a say that $1,000 invested in Berkshire Hathaway is worth now $6.5 million, but if Warren Buffett charged you 2% per annum, plus 20% of the gain over S&P 500, your funds were $485,000, a lot less.

    I think most investors (like people in AE schemes) are best suited to earn the market equity premia and not try anything more than that, as they barely understand what investing is.

  2. In my experience, the larger DB schemes don’t pay anything like 2+20% and haven’t done for some years – they negotiate much more reasonable fee structures. 1+10% is more usual for most except the really esoteric or niche funds. For large DC schemes to pay so much more than DB trustees can achieve is clearly not approrpriate in my view.
    But I still believe that the daily pricing and expected short-term liquidity of DC pension funds does not fit well with optimising long-term returns and members need to understand that if they want the ‘option’ to move their funds within just a few days (which most do not use and could wait longer or transfer in specie, as most are not going to actually withdraw their money for many years) – there will be a potentially heavy cost in lost returns. A diversified portfolio, including illiquids and assets that are not ready realisable instantly, will usually perform better and is likely to be lower risk in the long-term than just equity/bond assets with a tiny allocation to alternatives.
    I know that some people want to think of pensions like bank accounts with instant access, but that is not the way to optimise pension outcomes and is a sub-optimal way of thinking about pensions, which actually need to stay invested for the very long-term so you have money into your 80s, not just in your 60s.
    We need to help people recognise the risks of instant transferability and daily pricing and be willing to accept that these investments truly are meant to deliver over years, not days.
    I’ve seen the success of risk management in DB and I’m afraid it seems to me that most DC schemes have not moved into the modern era yet in terms of asset allocation.

  3. Pingback: Altmann and Fawcett on DC’s new bargain | AgeWage: Making your money work as hard as you do

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