The question has been bothering me for a while. While there are maverick allocations (Nest for instance use UBS for passive management), UK workplace pensions are dominated by the big three, who’s passive strategies are used by just about everybody else.

For the most part, I think this has been good for consumer outcomes. Relative to the returns offered by legacy personal pensions and by the esoteric DGFs such as GARS, the simple ,low-cost passive strategies of the “big-three” have delivered bigger pots with lower volatility.

To a great degree this is down to size. UK Workplace pensions are no big deal to State Street, BlackRock and L&G. The weight of money is in true institutional business and in particular in the de-risking of defined benefit plans. Behind the scenes, the big three are increasingly managing large portions of the insurer’s non-profit estate and global opportunities of course dwarf those in the UK.

It is worrying that while we may have 36 master trusts and close to 2000 workplace DC schemes, their money is increasingly managed by just three managers whose appetite for workplace pension business could wane.

Indeed , we have recently seen an instance of one of the three declining to participate in a large tendering organization as it was too much trouble. If tenders for passive mandates start becoming two-horse races, it will be time to get the Competition and Market Authority in.

Questions of governance

One of the worries that Government has , over workplace pensions is the focus trustees and platforms have on price. This is largely a result of the focus on cost and charges that the Government has pursued through the FCA so it can hardly blame fiduciaries and managers, especially as cost disclosure remains at the top of the agenda.

But the value that fund managers bring to the management of the assets they control is of more lasting importance both to the assets themselves and to the beneficiaries of their returns. Passive managers do not have to be passive when it comes to environmental , social and governance matters, indeed they have the bulk voting rights to make a real difference and it is good to see passive managers reaching out to the people who they are ultimately managing money for – through Tumelo’s software.

But, important as member engagement is, it cannot on its own, replace the creativity and innovation that comes from smaller, impact orientated, managers.

Searching for an image to illustrate this argument, I realised that socially responsible investment has become almost entirely about saving the planet from climate change. But there are other societal interests that matter too, not least our capacity to build back from a pretty shocking year for British society.

There are a raft of new managers setting up or scaling up, who are looking to challenge the big three for the allocation that large DC schemes will be making to alternative assets – and in particular the illiquid investments that are so important to driving the economy forward.

We are likely to see more large DC funds follow Nest in declaring an ambition to have 20% of the default managed in private markets and it will be interesting to see if L&G, BlackRock and State Street move into this space , nudging out smaller players to retain hegemony.

Although this may provide an easy choice for trustees and platform managers, it doesn’t sit easily with me. Would we have the focus on sustainability and social factors today were it not for small boutique firms such as Impax was a few years ago. Impax is now growing big because its impact based investment strategies have delivered great returns.

The best conversations I have with asset managers are those where the assets we are discussing are not quoted but will have the opportunity to be quoted if investment is made now. Pension Bee was an illiquid stock until earlier this year.

In February the Government called for evidence that the largest pension schemes were exercising their capacity to act as agents for social good. Guy Opperman said in the foreword to the consultation.

I’m proud of the progress we have made in bringing environmental and climate issues up the pensions agenda, helping make pensions fit for 21st century challenges.

But climate change should not be trustees’ sole consideration. Financially material social factors also pose risks to schemes’ investments, which is why we’re launching this Call for Evidence to understand what more can be done by industry and policymakers to protect savers.

By considering the risks – and opportunities – relating to supply chains and communities, employees and business models, local economies and landscapes, investment strategies can better deliver long-term value.

I would argue that the behemoths, L&G, State Street and BlackRock have little motivation to manage money with an eye to this long-term value.  They are so huge that local issues such as those that matter to everyday savers are secondary to the global opportunities to manage everything from sovereign wealth funds to legacy life books.

Leaving the future of our workplace pensions solely in their hands is a poor strategy that is unlikely to deliver long-term value. Better that smaller managers come yapping at their heels with new and innovative ideas and an attitude to asset management with a local focus.

In this sense “small is beautiful” and I look forward to the emergence of “craft” fund managers with micro-research which starts with companies valued from £1m to £100m. I see opportunities to fund socially useful start-ups led by entrepreneurs who are in touch with local communities and the people who live in them.

And I look beyond the big three for this kind of expertise, as I see little appetite in their boardrooms to get stuck in – where it really matters.

And I look to trustees and platforms to think beyond the immediate price of management towards the factors that really make a difference, the outcomes of these investments.