Private markets investing

Speaker 1 (00:00):

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Speaker 2 (00:06):

Hello everybody. My name's Johnny, and this is, hi, I am Rachel. Welcome to Pension Geeks Employer News. Where? That's right. It's good to be back, Johnny. It is good to be back. It is good to be back. And today we're going to be tackling well, we're gonna be looking actually at the defined contribution pension landscape and how it's changing. And to do that, we're joined by Lorna Blyth. Hello, Lorna. How are you doing?

Speaker 3 (00:31):

I'm well, thank you. Nice to be here.

Speaker 2 (00:33):

Oh, and lovely to have you on the show as well. So, Lorna, before we get started, are you able to quickly tell us about what your job role is and what, what do you do?

Speaker 3 (00:42):

Yes. So I'm managing director investment proposition at Aegon, and that means I'm responsible for the default funds that are available to members when their employer chooses Aegon as their pension provider.

Speaker 2 (00:53):

Lorna, we know how important the default funds are, or default funds are. You know, the majority of us in the workplace are in them. Yeah. And end up staying in them and end up staying in them as well. Unless you choose your own investment Yeah. Funds yourself. Exactly. But to me that sounds quite a daunting thing to do. Absolutely. Knowing if you put any money in the right place, what the investment, especially when you haven't got massively a big background about investments. That's, and pensions. That's it. That's it. And you, you, you don't wanna make the wrong choice, do you? Exactly, exactly. So Lorna, can you tell us like why DC pensions need to evolve and especially right now?

Speaker 3 (01:36):

So you're right about the importance of default funds. The vast majority of people are in them, which means they need to be appropriate for young investors, older investors, and for quite a long timeframe. If you think about how long you're saving for, you know, over your career and really right now is an interesting time for DC defaults because there is such a lot of change going on. So if we think about it at kinda high level themes the first one is I, I guess really the shift from defined benefit to defined contribution. Now that's been happening for quite a long time, but we're now at a tipping point where the vast majority of the work workforce are going to be relying solely on their DC pension pot to deliver their income in retirement. And of course, we're all living longer, so that income has to last for a long time.

Speaker 3 (02:24):

So the growth that your investment delivers needs to support all of that. So that's number one. And number two is really the investment environment that we find ourselves in. So, you know, we've seen a rise in geopolitical tensions if we think even over just the last five years we've had COVID, Ukraine, we've had a gilt crisis in the UK. We've had trade tariffs, we've had the war in Iran, and all of that impacts market volatility. And I guess the pace of that is quickening. And then the third thing, which is more longer term is the impact of climate change, right? That is systemic, it is unavoidable, and that is something that we will need to face into throughout the, you know, the investing timeframe that, that we're all in. And then I guess on top of all of that, we've got regulation, which is really driving a much greater focus on value over cost. So the, all of these things are, are reshaping how we think about default design and how we might change that going forward.

Speaker 2 (03:25):

Lovely, thank you. So does this mean then that traditional default design may not be appropriate?

Speaker 3 (03:32):

Well, traditionally defaults would invest in a mix of equities and bonds and that did very well. But, you know, going forward, equities are still a really important component because they can drive the growth. But they do come with volatility. And what we're seeing now is a much higher level of concentration risks. So particularly in the US for example, where some of those returns are driven by a very small number of large tech companies. And what we've seen is that, you know, in the past, bonds were a great diversifier against equities because they'll move in different cycles. But more recently we're seeing them moving more together. So when equities fall, bonds are falling as well. And that's really weakening the role of bonds in a blended default. So as someone who thinks about default design, it's about looking for different sources of return, different sources of diversification that can help to support in retirement outcomes over the longer term.

Speaker 2 (04:28):

So for those of us who don't know, can you explain what private market investments are and why addressing them you know, will help these challenges?

Speaker 3 (04:41):

Yeah, so, so private markets are investments that are not traded on a public stock exchange. Okay. So if you think about investments such as commercial property infrastructure like airports, transportation, forestry, you know, these are all investments that you can't buy and sell on a daily basis. And they can deliver a really great source of diversification if held within a blended default. And then the other part of that is private equity. So companies that are not listed on the stock exchange. So and, and what we've seen, you know, more recently is that companies are staying private for a lot longer. And so some of that really kind of high growth value creation is happening outside of the public markets, which is where traditionally defaults have been investing. So, you know, members are missing out on the potential for these new sources of diversification, sources of additional return, and because they've not been invested in private markets, so so including an element of those within your default can really help to improve that kind of return profile, particularly over the longer term.

Speaker 2 (05:49):

It's pretty exciting today, potentially we own part of a forest or a big air hanger or something that it's cool to know where your pension is. I invested is quite exciting.

Speaker 3 (05:59):

Yeah, it's much more tangible, isn't it?

Speaker 2 (06:00):

Yeah. Yeah, it sounds cool. That's it. Yeah. Okay. So if I were an employer, what, what do I need to think about in terms of risk, complexity and cost when considering private markets in a default fund?

Speaker 3 (06:15):

So private markets, I, I guess one of the things to consider is, is manager skill, right? So the one thing about private markets is that the performance dispersion that we see across different types of private markets is much broader than you would see in public markets. So that means really that the ability of the, the manager to identify and source deals to negotiate the transactions to, you know conduct the due diligence, their kind of expertise and track record, their ability to select the right investment is, is really important and that really will drive returns. And it's about how that private market component then fits in with the other things that the default is investing in. So overall, what is that bringing to the party, if you like? And, and private markets are more expensive, so there is a cost consideration there.

Speaker 3 (07:07):

And as I said, they are, you know, we can't trade them daily. So there is an element of liquidity risk. So as a a, you know, somebody who designs defaults, we need to think about how do we manage all of those additional complexities, you know, what new processes do we need to bring in to ensure that we are able to manage all of that appropriately for members. And they're not disadvantaged by that. The regulator has set up a, a structure called long-term asset funds, and they are specifically for holding these types of investments. So that can bring a, a degree of, it's like a framework in terms of how you can deal in and out. So subscribe and redeem assets money from them. And, and that's a, that brings a lot of comfort if you're holding the, the private markets within these types structures.

Speaker 2 (07:54):

Brilliant. No, thank you. And so what is Aegon doing to ensure their default investments are working as hard as they can for members?

Speaker 3 (08:03):

So we have focused on evolving one of our largest defaults, so Universal Balance Collection. And, and this happened last year where we introduced three long-term asset funds with, by three different managers to hold these different private market investments. And that's a 14 billion pound default strategy. There's over 700,000 members invested in it, and they are all now benefiting from the types of investments that we spoke about. And this year we'll see us extend that approach into Aegon Lifepath. So that will mean our further 300,000 members will get access to that.

Speaker 2 (08:38):

Wow. Wow. Lovely. A lot of people. That's great. Fantastic. Fantastic. So what should employees be looking for in defaults that are ready for the future?

Speaker 3 (08:50):

So I think it's about being aware of developments that are taking place. So the ability to access these types of investments to you know, check in about how often is the default being reviewed by the provider, what are they doing in this space, you know, it's really important that that defaults keep pace with, with the opportunity set that is available for members to, to ensure that the, the returns that they're receiving, you know, are as good as they can be. And really to reflect the reality of longer retirements you know, navigating the uncertain markets that we find ourselves in and, and, and that pace of change.

Speaker 2 (09:25):

Well, certainly, I, I think every time we speak about investments, everything seems to be changing in the world. There's always something happening. Yeah, there's been a lot, hasn't there? Yeah. So it must be quite challenging to, to do that, to do that. Lorna, could you just give us a quick summary? We've nearly wrapped up now, but a quick summary for everybody before we go.

Speaker 3 (09:46):

Yeah. So I guess the big question is, is your default fit for the world that your employees will be retiring into and that is one of longer, longer lives, greater uncertainty, greater pace of change, you know, and most members are entirely reliant on the, the, the, you know, the performance of their default. So the decisions that are made around the design of that, where it's investing, the oversight and governance are really important. And getting that right is fundamental to ensuring that your employees get a great retirement and that their savings are being invested carefully, they're being managed well and that they're fit for the future.

Speaker 2 (10:34):

Lorna, thank you so much for that. It was so interesting. I think I've definitely learned some things today. Absolutely. It was so informative. Yeah, it's definitely been helpful, very exciting about private markets as well, knowing, knowing more about that. Yeah. Yeah. But so thank you Lorna. Thank you. Have you enjoyed it.

Speaker 3 (10:49):

Yep. That's been great. Thanks everyone.

Speaker 2 (10:52):

Brilliant. And thank you for joining us as well, and make sure you tune in and watch out for the next Pension Geeks Employer News. Take care. Bye. See

Speaker 3 (11:01):

You soon. Bye.