I have looked on with interest as this government’s pension investment review consultation suggests that the drive to lower member charges may no longer be entirely seen as a positive as it has stifled innovation. This is quite the reversal given governments of all shades have for many years looked to push down pension costs for the end user, as Steve Webb so memorably stated.And it’s true that charges in the UK are, internationally, very competitive. On average, much lower[i] than the circa 61 basis points[1] Australians pay.
Given we see regular comparisons between UK DC and Australian superannuation schemes, does the extra cost offer huge outperformance Down Under?
Not really. On average, an extra 0.24% per year[2], compared to UK defaults during the growth stage is noteworthy but it’s not the huge difference that, for me, merits the hype, especially when you factor in different charges.
And it’s easy to overlook the reason that the Australian DC system is heralded for good outcomes, is less about accessing private markets and outright investment performance, more about the very high level of employer contributions paid into the system compared to here. Next year, Australian employers will be paying in 12%, something very unlikely to happen in the UK any time soon.
Most UK DC assets are invested in default funds or strategies designed and managed for the majority of members. In this context, the DC sector is approaching this call for private market investment in several different ways.
Some workplace pension providers say they don’t see private assets having much, if any, place in their main default strategies in the near future.
For the most part, they’re going to be using ‘premium’ type funds to access private markets with allocations ranging from 10% to as high as 25%. How does this help with the government’s drive to consolidate DC default funds into large asset pools? From where I am standing, it simply doesn’t.
Other providers will be slowly expanding private market allocation in their current ‘go to market’ default but they seem to be the minority.
Whatever option pension providers take, accessing this asset class will be more expensive and I expect charges potentially north of 0.5% for these premium funds, whilst keeping under the 0.75% cap (unless government intervenes to raise or remove it).
Expectation is building in the private equity industry and also the climate transition business – seen as a likely beneficiary – about the potential wall of DC money heading their way.
And herein lies the problem. It’s not the ability of DC schemes to access private markets but rather the opportunity set that concerns me.
The global private asset market may be huge but its already very competitive and the same overseas pension funds our government wishes to copy have already landed in the UK. Canadian funds own a number of our airports – and Thames Water – and the bigger Australian schemes have been opening offices in London.
As it stan
