How master trusts could save on private markets investment fees

A report published by The People’s Pension found that bringing fund selection and management in-house and accessing co-investment opportunities could drastically reduce the costs of investing in unlisted assets such as private equity and infrastructure. 

The report comes as the government is seeking to encourage greater scale in the defined contribution space in order to improve governance and the ability of pension schemes to invest in these asset classes. 

The Department for Work and Pensions estimates that, by 2030, combined master trust assets under management will reach £420bn. Based on this, The People’s Pension’s report calculated that an aggregate allocation of 10% in private markets could cost as much as £1.5bn in management costs. 

By bringing some aspects of private asset investing in-house and pursuing co-investment opportunities, the report estimated that master trusts could cut costs by around 60%. 

However, it also stated that no master trust currently has the scale to fully take advantage of these fee-saving opportunities, despite rapid growth in the sector. 

Dan Mikulskis, chief investment officer at The People’s Pension, said: “Large pension schemes around the world tend to make significant investments in private markets as the government is championing, and we hope this report provides food for thought for both the industry and policy makers as we develop plans to invest the hard-earned savings of millions of UK workers. 

“Private markets can contain exciting long-term investment opportunities for millions of pension savers, but too often the advantages are reduced, or cancelled out entirely because arrangements are such that asset managers take most of the benefits through high fees.” 

The People’s Pension plans to deploy around £4bn in private markets and is currently hiring staff to support this work. It has also established an internal investment company to oversee the master trust’s investment portfolio and work closely with the trustee board.  

Toby Nangle, a financial markets analyst and author of the report, said: “Private markets offer opportunities to pension investors, but also challenges. And international experience shows that scale is the key to boosting member outcomes.  

“For private market allocations to enrich pension members rather than only external fund managers, schemes need sophisticated internal capabilities.” 

• Phil Butler, deputy CIO at The People’s Pension, will be speaking on UK private markets investment at Pensions Expert’s UK Investment Summit in London on 27 February. Visit the event website to register and access the agenda.