For Edi and Andy to do business, DC must grow up.

Let’s put aside all the arguments over how IRRs in the private equity world are calculated and address Edi’s fundamental question “why would private equity managers want to market their services to UK DC pension platforms?”.

As Edi Truell is such a manager, his post carries rather more clout than the comments that follow it (you can read them on this link).

For those who don’t know about these things, I believe that “most favoured nations” clauses mean that anyone who has one is entitled to a fee reduction to the level of the lowest paying participant in the fund. If that participant is a DC pension platform (of whatever guise) then there is the threat of contagion, your margins on the whole fund are under threat, in Edi’s example , the price of contagion is 200 times the loss of margin on the DC deal.

This is a high price for PE managers to pay.

The alternative is for the Government to intervene further, for instance requiring DC funds to diversify into private equity at the full cost of the product. This is what I think Andrew Warwick-Thompson (formerly head of TPR’s DC work) is fearing

This is a terrible idea and is not in the best interests of DC scheme members. Rather, it supports the investment industry to ramp up its own profitability at the expense of pension savers and the Government’s misguided attempt to rope pension schemes into their “growth agenda”.

I’ve put the final comment in bold because it poses a really tricky question, not just about DC saving – which is what Andrew goes on to talk about, but the business of spending those savings (where there is much more money for the “investment industry” to make.

Let’s note that the charge cap only applies to the accumulation of DC assets in a DC fund and then only in workplace pension schemes qualifying to take contributions from employers under auto-enrolment. This is currently the bulk of the DC market but that is changing.

Currently, master trusts such as the two Andrew is a trustee to , (Cushon and Scottish Widows) are only accumulating savings for their members, they are not offering a default in retirement. Currently they are only being judged by employers and trustees looking to consolidate schemes to them on price. Here is Andrew explaining.

 “the real obstruction to the use of illiquids (or any other innovation in DC) is the “race to the bottom” on fees in the DC workplace pensions market. When adviser recommendations to employers are based upon a difference of 1 or 2bps rather than the likelihood of the scheme providing better member outcomes, tinkering with the charge cap is clearly not going to help”.

For nascent master trusts to compete, they have to play on a pitch which is tilted by price not value. If all DC pensions adopted investment strategies which invested in the same way then investment would be commoditised and price would be more of a factor. Those who argue that member outcomes are influenced by soft features that encourage greater attention to the pension may differ, but most decision makers  are indeed commoditising performance and differentiating on price.

It strikes me that if trustees want to change that, they are going to have to demonstrate that investment is not a commodity (rather than trying to win the argument through engagement). If a ceding trustee or employer or employee representative, were to read that the master trust they were considering had an exposure to PE that was delivering 17% over 25 years AND BELIEVE THAT WAS REPEATABLE, then they could and should pay for that exposure in higher fees (which of course are ultimately paid by members).

The trouble is that NOBODY in DC land actually believes that Private Equity can deliver those kind of nominal returns over a sustained period and that is down either to ignorance of what private equity managers do things or a lack of belief in the sustainability of the returns.

And, as Edi Truell is saying, why should PE managers be bothered explaining their product to DC pension schemes? Why should Trustees be investing their time in trying to understand a product that cannot be embedded in their scheme’s investment strategy?

How matters could change.

There is no doubt that DC money is “sticky money”. Even when the saver’s time horizon is limited by some artificial concept called “retirement age” , the investment duration is measured in decades not years. This is helpful for all fund managers.

But if the investment horizon was “whole of life” and if DC schemes were considered as providing services to and through retirement (whole of life CDC) or “in retirement (decumulation CDC), then the  proposition for PE managers such as Edi Truell changes.

Indeed, one of the reasons that Edi is interested in CDC is that it changes the relationship between the investment platform and the fund manager. Now the objective is not to compete on price but to compete on outcomes (value). If my fund has to achieve ambitious investment targets that beat the market beta considerable amounts over the long-term, then I am going to be much more interested in claims that 17% pa has been returned over 25 years.

CDC moves DC into a territory previously inhabited by annuities and recently occupied by “income drawdown” which is frankly in its infancy. For drawdown to grow up – it will have to tackle the issues of longevity, smoothing and ultimately of value creation that have been the concerns of DB schemes and their trustees for over 100 years.

CDC – whether as a whole of life or  in retirement pension , is the business end of DC. That’s why Willis Towers Watson are getting involved, why the likes of Edi Truell are taking notice. If Andrew Warwick-Thompson wants to move the dial so that advisers consider master trusts on value not price, he should consider retirement options a lot more seriously!




About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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2 Responses to For Edi and Andy to do business, DC must grow up.

  1. John Mather says:

    If you want private equity in your portfolio you might consider SEIS where the individual can be closer to the information on where to invest. The tax benefits are greater and there is no risk of breaching the LTA for such a successful performance record.

  2. Julius Pursaill says:

    Cushon does of course already allocate to Private Equity in its default fund (around a 6% allocation) both because of its expected return, but also because of its climate characteristics (wind, solar, green hydrogen, battery tech). Cushon also offers an in scheme drawdown facility with comprehensive risk metrics to support it. In due course, (regulations permitting) that post retirement strategy will also have exposure to alternatives.
    It’s true that it’s difficult for own trust DC schemes to access private equity, but rapidly growing Master Trusts are perfectly capable of securing exposure within sensible fee budgets.
    But extreme low cost pricing strategies are indeed still driving much of some consultants selection criteria and, critically, much employer decision making. It’s arguably employers that are the major obstacle in differentiating between price and value.

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