A roadmap to a resilient retirement

For professional clients only.

[00:00:00]

Sophie:

Welcome to PensionShip, the podcast series from BlackRock for professional investors, where we share expert insights and opinions on some of the key trends that are shaping the UK retirement market. I’m your host, Sophie Dapin, and I’m delighted to be joined again by Muirinn O’Neill, who leads on retirement policy at BlackRock.

[00:00:21]

Muirinn:

Hi, Sophie.

[00:00:22]

Sophie:

And Adam Baker, who leads on solutions for defined benefit clients at BlackRock.

[00:00:27]

Adam:

Thank you for having me on.

[00:00:28]

Sophie:

Defined benefit, or DB, pensions are a really important and large part of the UK pensions market. When we last spoke, we talked about the change that we’re seeing in this space: funding levels improving, the introduction of the new DB funding code, superfunds and the renewed focus on unlocking surplus funds for investment in the broader economy. Since then, we’ve seen the pensions bill, and there are some really interesting developments for DB schemes. So Muirinn, can we start with a summary? Tell us what’s happening, what are the timelines and what change can we expect to see from a policy perspective?

[00:01:03]

Muirinn:

Thanks, Sophie. And I think one thing to say from the outset is that in this series, we’ve been talking a lot about some of the changes in Defined Contribution (DC) and Local Government Pension Scheme (LGPS). And I think one of the points that we’ve stressed repeatedly is that a lot of these changes are happening very fast and all at once. I think that was the last podcast we were talking about the March 2026 deadline for LGPS to do their entire transition. I think it’s fair to say in DB we’re moving slightly more slowly, slightly more tentatively and slightly more in a consultative manner.

[00:01:35]

Sophie:

Why is it so much slower than in the other areas?

[00:01:38]

Muirinn:

I think there are two main drivers for this. If you think about the funding journey that we’ve been on with DB, if we think back five years before that, the sort of deficits that we were seeing, I think government is very mindful of that fact and the fact that we’ve been on a bit of a journey and we’re now in a good position, and I don’t think they want to do anything that moves things too much and might upset that balance.

And I think on top of that, the other kind of driver here is DB schemes are one of the biggest buyers of UK government debt, and they have to be mindful of the fiscal environment when they’re making changes. And I think that’s a point that they’ve stressed repeatedly: that stability of the gilt market is of utmost importance to them and so they are a bit more consultative and tentative in their changes around the DB framework.

[00:02:25]

Sophie:

And at a very high level, what kind of changes are we expecting to come through?

[00:02:29]

Muirinn:

I’d say there are two main changes that we’re going to see in the Pension Schemes Bill. So it introduces a new legislative framework for superfunds, which feels like we’ve been discussing for a very long time, but we are going to finally get a legislative framework in 2028. And then we’re also going to have a new regime for surplus sharing and extraction. And again, that’s going to be up and running in around 2027, 2028.

[00:02:54]

Sophie:

I think this is a really interesting point because there’s almost like this expanded menu now for DB schemes. It used to be that pretty much the majority of schemes would look to insurance buyouts. Now there’s kind of superfunds, surplus extraction, other options. Adam, you spend all day every day with DB pension schemes. What do you see with this expanding menu of options?

[00:03:17]

Adam:

Yeah, you’re spot on. The menu’s definitely expanding quite a bit. The route to buyout remains pretty active, even if volumes in 2025 are a little bit down on 2024. That’s largely been driven by the upper end of mega-deals in the market, where we’ve seen fewer, but equally, the smaller end of the market has seen some pretty striking growth. So a lot of those smaller schemes going through to buyout. And this is relatively logical because that’s where the costs of running on are proportionately higher, but it’s still a pretty noteworthy trend. So it’s unsurprising that buyout remains popular. But as you exactly said, it’s not the only show in town anymore, and it’s been quite exciting to see a number of new innovations. So the new superfund deals that have gone through, but also new superfund launches.

[00:03:57]

Sophie:

And this is really significant because, to Muirinn’s point, we’ve been talking about superfunds for a long time. Even a few years ago, the idea of an actual superfund deal happening was really significant. And now we’ve actually seen a handful of these. You don’t want to understate how important this is for the market.

[00:04:11]

Adam:

Exactly. It’s a recurring topic, but one that we’ve certainly seen some material progress on recently. So there’s been a handful of transactions from Clara using their approach of a superfund as a bridge to buyout. But it’s also noteworthy to see new entrants, such as TPT, launching a superfund that’s more geared towards running on. So those superfunds have that real potential to add more flexibility to trustees and to sponsors who may not wish to or may not be able to pay the requisite premium to insurers, but are still interested in exploring some of these sort of capital-backed solutions that can help get them towards their desired end game.

But I think alongside this well-trodden path to buyout and the changes that we’re seeing in the evolution of the superfund space, probably the most striking change of all is what Muirinn mentioned, which is this progress in legislation and frameworks towards surplus sharing. So today it’s most readily accessible for schemes that have mixed DB and DC trusts. So is there a way they can use any surplus in the DB scheme to help fund their DC contributions, for example? But we can see that legislation evolving even further to create additional avenues to use that surplus generated for schemes even that don’t have that common trust set up.

[00:05:16]

Sophie:

So Muirinn, what are the actual changes in the regulation to allow surplus to potentially be released?

[00:05:23]

Muirinn: So we have a number of proposed changes as well as some changes that have already come in. So in terms of changes that have already come in, we had a tax reduction on surplus extraction. So it used to be taxed at 35% and from April 2024 that went down to 25%.

[00:05:38]

Sophie: So that’s to try and incentivise companies to want to do this.

[00:05:39]

Muirinn:

Yeah, to make it less expensive to do. And then we’ve had a number of proposed changes. To my earlier point, I would note that the government’s language around this is a lot more tentative. So it’s things like “we’re minded to do this,” “we will discuss this with industry subject to consultation,” which, as we’ve discussed previously, is not the type of language they’ve necessarily used in relation to DC.

But there are a number of proposed changes. So, government is proposing a statutory override, which will allow pension trustees to make surplus payments to sponsoring employers, even if their scheme doesn’t permit that at the moment.

[00:06:15]

Sophie:

And that’s quite significant, isn’t it? The idea that it can override what has already been in place for a scheme?

[00:06:20]

Muirinn: Yes, and the fact that trustees have that decision and they can do so long as they’re comfortable that it’s in their members’ interests, which is a really important part of all of this. And then the other change, which I think has been quite interesting and gotten quite a lot of reaction in industry, is the redefined funding threshold for surplus sharing. So previously, you had to be funded on a better than buyout basis in order to do any form of surplus extraction. That is now moving to funding on a low dependency basis, which is a much more, I would say, permissive regime than people might have expected.

[00:06:53]

Sophie:

So it’s lowering the bar at the point at which you’re able to extract—

[00:06:55]

Muirinn:

Yes, and I think when we first started this conversation, we wouldn’t have necessarily predicted that the government would be as open to some of that. But I think it all comes back to the conversation that we’ve been having throughout this series about the two drivers here. So there are those structural conversations and the fact that the system needed some updating, which we’ve mentioned previously. But there’s also the government’s focus on growth, and that’s a big part of the story. If you look at the government communications around surplus extraction, a lot of that has focused on how that is linked to growth, and how this is money that can be invested back into businesses. I think the figure that they have repeatedly used is £160 billion, which I think for a lot of people feels quite high. I’m looking at Adam. I don’t know if you also feel like £160 billion feels very optimistic?

[00:07:51]

Adam:

Yeah, I think that’s looking across the whole population of schemes. And really the fact that we are seeing some of the smaller end of the market look towards buyouts, as that preferred route will help mitigate some of that and take some of that £160 billion away.

[00:08:03]

Muirinn:

Yeah, so I think the way that they are thinking about this is as a possible route to more investment. And so that kind of explains why they have been a little bit more permissive than we probably would have thought at the start of this journey.

[00:08:16]

Sophie:

I think one of the really interesting things around surface extraction is, how do you do this in a way that’s fair to members? How do you balance all the different kinds of competing needs and requirements? Adam, how should schemes think about surplus attraction?

[00:08:31]

Adam:

Yeah, it’s a great question. And I guess the first thing, even before we delve into it, is taking a step back and reminding ourselves how much of a positive development we seem to be able to be asking ourselves these sort of questions. Lots of schemes have moved from a point of really focusing on managing deficits to a point they’re managing surplus.

So that surplus is hugely beneficial and it can be seen as a strategic asset for these schemes. It opens up a much broader set of choices for trustees and for sponsors alike. So we think it’s worth being very deliberate and considered when you look through that and to look at it through three lenses: purpose, partnership and process.

[00:09:03]

Sophie:

Easy to remember, three Ps.

[00:09:05]

Adam:

We like making it easy to remember and catchy. The three Ps is exactly right. So I guess if we go through them in turn, purpose is the first one. What’s the surplus for? It’s a really important and key question, and really thinking about that drives everything else. So are you looking to try and generate surplus to enhance member benefits? Are you looking to support DC outcomes? Or perhaps it’s around reinvesting in the sponsor’s business, or possibly a combination of all of these.

If we then move on to think about partnership, as with most things, it works best when there is a genuinely collaborative discussion across trustees, sponsors and all other stakeholders. So setting those clear thresholds and governance protections is incredibly important, and that’s what ensures that the member outcomes are protected, which we think is absolutely fundamental to all discussions around surplus extraction.

And then finally, the third P, on process. So we think too often that buyout and run on can be framed as a really simple binary choice, an either/or. And we think this is oversimplifying things. Surplus generation can be really important both as a pathway to buyout, but also as a credible alternative, whether it’s in the shorter term or even over much longer horizons. Working out how you decide on that preferred strategy and how to potentially pivot shouldn’t be a one-off conversation. It should be something that you continue to assess on an ongoing basis. We think there’s quite a lot of schemes out there who might eventually go to the buyout market, but for various reasons they don’t want to do it quite yet. Maybe it’s a young scheme with lots of active members who are relatively more expensive to insure. Or maybe there’s a desire to maintain a bit more control over potential benefit uplifts for a little bit longer. So from an investment perspective, the optimal portfolios for generating surplus whilst running on and for preparing to go to buyout can look really quite different.

Now, we’ve written about this. We had a paper out there called “Mind the Surplus”, which I encourage people to read. We’ve worked with a lot of our clients and their advisors to go through the implications of this and really trying to help people understand the opportunity cost here to maintaining the flexibility of moving quickly to buyout, and we think it’s really important for schemes to think about this in more detail. It’s not something that we would be evangelical about and prescribe one-size-fits-all, because it really depends on the scheme itself – on their structure, their funding level, the sponsor covenant, the stakeholder objectives, the size that we talked around as well. But making sure there’s really deliberate thought around that trade-off in place, we think is critical, because if not, you might be leaving some value, some return on the table that could generate surplus that you could then use for a really beneficial purpose for all of those stakeholders.

[00:11:18]

Sophie:

So we like to finish our podcast with predictions. So when we listen back on this podcast in many years’ time, we want to hear what you think the DB market will look like. Muirinn, shall we start with you?

*Forecasts/Estimates may not come to pass.

[00:11:31]

Muirinn:

I think what I would underline is that we are going to see a pretty thorough consultation process, but I think there’s a lot of scope for industry to feed in, for people to have a conversation with government to shape these regulations. And so it’s worth thinking about what you want to do right now, because they’re going to be consulting on this but if you have a sort of idea of what this might look like, what it might look like for your members, what sort of surplus sharing you have in mind, that’s something that you could discuss with government and help shape these regulations. So I think we are likely to see a very consultative process.

[00:12:10]

Sophie:

Great. Adam?

[00:12:11]

Adam:

I’m going to cheat a little bit as well and give you predictions that span all three parts, those end-game landscapes that we talked about. So buyout, superfunds and run on.

[00:12:18]

Sophie:

Very detailed prediction.

[00:12:20]

Adam:

I know I’m just hogging the microphone here, but I think for the buyout side, we might not see any new entrants or many more new entrants now. We’re already in double figures, but I think we’ll see some real competition among those existing insurers, and that will show up in some of the solutions and potentially drive a bit more innovation around both pricing, but equally the execution, how schemes really look about making that transition to buyout.

I think for superfunds, I think we’ll see even more evolution in the capital-backed space here. That’s where you could potentially see more new entrants. And I think you’ll also see a much clearer role emerging for how these vehicles really sit in the overall market architecture and ecosystem.

And then for run on, I think this is the most important of the three. I think this is where we’ll see many more schemes take that deliberate and strategic approach. So really setting out those clear plans for how they’ll both generate surplus and utilise surplus over time. We think it’s a really big benefit for schemes that are deliberate in those choices between the three different end games and how they value that impact of flexibility.

As always, the early bird catches the worm. Those who start early, engage with trustees and set that really clear framework for surplus will be best placed to really capture that opportunity. And it’s not easy because you’re trying to create some certainty against a backdrop that itself is fraught with uncertainty. So to Muirinn’s point earlier, the regulatory framework is evolving now as we speak, but having that clarity around both your central strategy, but also revisiting and having that adaptability of when you should pivot and how you pivot, is really beneficial. So we’d encourage people to really get ahead of this rather than waiting for all the puzzle pieces to be fully locked in before they really start engaging and thinking about it in more detail.

[00:13:50]

Sophie:

Absolutely. And we would encourage people to read the “Mind the Surplus” paper, which Adam mentioned. It’s great. And we have also included a link in the podcast so that you can read it more easily.

Now, if I attempt to summarise our conversation today, as with all types of pensions, there’s a lot of change. Lots of things are happening. It’s going to take a little bit longer for these changes to come through, but we’re going to see quite a lot of innovation, especially in the kind of superfund, surplus, run on space. And it is essential to start planning now to make the most of this.

Thank you, Muirinn.

[00:14:24]

Muirinn:

Thanks so much, Sophie.

[00:14:25]

Sophie:

And thank you, Adam.

[00:14:26]

Adam:

Thanks very much.

[00:14:27]

Sophie:

And then thank you very much for listening. Please do subscribe and join us next time.

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For professional clients only.

[00:00:00]

Sophie: Welcome to PensionShip, the podcast series from BlackRock for professional investors, where we share expert insights and opinions on some of the key trends that are shaping the UK retirement market. I'm your host Sophie Dapin, and I'm very happy to be joined again by our regular guest, Muirinn O'Neill, who leads on policy engagement for retirement in the UK for BlackRock.

[00:00:23]

Muirinn: Hello again.

Sophie: We're both delighted to be joined by a new guest to the podcast, Tamryn Rowlands, who works with Local Government Pension Scheme, or the LGPS.

[00:00:33]

Tamryn: Great to be here.

[00:00:34]

Sophie: It's great to have you. So today we are going to be delving into the world of LGPS, and this is a really interesting area partly because they are some of the only open defined benefits pension schemes left in the UK and they're also a really important part of how the government is considering its pensions agenda. So to start, Tamryn, tell us, for those less familiar with the LGPS, what exactly are they and why are they so interesting, especially at the moment?

[00:01:04]

Tamryn: Great, thanks Sophie. My specialist subjects. I bore everyone. It's great to have people interested to listen. Right, so LGPS stands for the Local Government Pension Scheme, and that's about 98 schemes across England, Scotland and Wales, representing or serving seven million members. And these members are public sector workers.

[00:01:24]

Sophie: So there's been a lot about how private sector have all shut down their DB schemes and are all in DC world. But public sector workers here with DB pensions.

[00:01:32]

Tamryn: Exactly, that's right. So open, growing DB pensions within the public sector. And the sector’s assets, to that point, are around £450 billion and that's set to grow to over a trillion by 2040 because it is open and growing. What we've seen characterised in this sector particularly is pooling set by the government. Currently there are eight pools in England and Wales. But it's important to note that Scotland remains independent of pooling, so there's no pooling in Scotland. There's some collaboration, but there's no pooling. Maybe just quickly define some terms in case I say this without thinking, but—

[00:02:11]

Sophie: Yeah, what is the pool?

[00:02:12]

Tamryn: So you have the pools, and then underneath the pools you have the partner funds. These are like the local authorities. So think like Somerset, or a London borough or Manchester.

[00:02:24]

Sophie: So are they the underlying schemes or do they themselves have lots of underlying schemes?

[00:02:27]

Tamryn: That's right. So the underlying scheme is a partner fund, and they have pooled and come together into eight LGPS pools within England and Wales.

[00:02:37]

Sophie: So Muirinn, if we talk about what the market's going to see next—and Tamryn's mentioned that there are already pools—what are the further changes that the government has suggested?

[00:02:47]

Muirinn: I think when we're thinking about this, it's important to think about the journey that we've been on. So, we had the first round of pooling, which was instructed by the government, in 2015. I'm looking at Tamryn for a nod.

[00:02:58]

Tamryn: Yeah, that’s it. I've been in LGPS for so long.

[00:03:01]

Muirinn: So yes, we had the first round of pooling whereby the government said to the partner funds: “You need to come together and form asset pools and bring your assets together onto a pooled platform.”

However, they weren't particularly—they didn't tell the schemes exactly what that needed to look like, what the pools needed to have in terms of governance or structure. And so the eight LGPS pools that currently stand grew up organically. And what that has meant in practice is that they have different governance structures; they are set up in different ways.

[00:03:33]

Sophie: Sorry, do you mean they are different—so the pools are different to each other, but also within the pools, is it different the way that the different partner funds are—

[00:03:40]

Tamryn: That's right. Yeah, exactly. And they've got different numbers of partner funds as well, which features in their structuring.

[00:03:46]

Muirinn: Yeah. And so some of them have been FCA regulated, some of them are not. And yes, they're all structured slightly differently, and they have different relationships with their partner funds as part of the government's broader work on both the growth agenda, but also on looking at the pensions market and thinking whether it's working efficiently. What they have been trying to do is bring a little bit more structure and a bit more uniformity across the LGPS. And so we are going to move from eight pools to six pools and they will be larger.

That's the plan. But they will also have similar governance structures, they will have more control in terms of what the asset allocation looks like across their partner funds and more generally, they will be regulated as asset managers as opposed to the current situation whereby different schemes can get their own investment advice and set their own SAA, or strategic asset allocation. That will now sit with the pools. So, they will have a lot more control and be more of a body which brings together the partner funds and makes investments decisions.

One other thing, it's very important to note, is that the timelines for doing all of this are very quick. So the deadline for pooling is March 2026. At that point, the government wants to see all of the assets sit on pooled platforms. So that means that both the pools that have been told they're not moving ahead will need to consolidate with other pools, but also not all of the assets from partner funds were pooled before this work started. So they might be part of an LGPS pool, but they didn't necessarily have all of their assets sitting on the platform.

[00:05:21]

Sophie: But they have to literally sell their existing assets and asset allocation and move it over to the pool.

[00:05:27]

Tamryn: Yeah, that's totally right.

[00:05:28]

Sophie: So by 2026 in March.

[00:05:31]

Tamryn: By March 2026.

[00:05:32]

Sophie: That's like a very quick timeline, especially for pension schemes.

[00:05:35]

Muirinn: Yes. Very quick. And across the pools, they would have different percentages of assets that currently sit on the pool, the platform. So there is a different amount of work based on which pool you're in. It's pretty punchy and it's a lot going on, and I'm sure it's very stressful for the LGPS as they go through these changes.

[00:05:54]

Sophie: So Tamryn, how are your clients responding to this?

[00:05:57]

Tamryn: I think one thing the LGPS has done—they're really resilient, they've obviously gone through a lot of government change over time, and they've really stepped up here and delivered. I think a lot of them have been extremely busy over the summer.

If you think about the 21 orphaned partner funds, they've had to find a new home. So they're going through due diligence processes with their potential new pools, but also having to ratify those decisions through committee. So I think it's been an extremely busy time for them. You've got the partner funds that are sitting in a pool today where, as you said, Muirinn, they are having to now move assets on or think about how they move assets onto the pool.

The pools have been working with them and putting in place oversight and governance arrangements or they’re having to actually move assets. So I think there's a lot going on there. At the same time, they're also having to deliver their fiduciary obligation to their members. So thinking about their strategic asset location, the SAA that they've set, how are those filtering in? Are they delivering against those? Are they implementing against that? So I think there is a lot going on. There's a lot that they've had to do and had to take on. But I do think they are resilient and are working through it as best they can.

[00:07:06]

Muirinn: And one other thing to note is I think there was some thought when this March 2026 deadline was first proposed, there might be some flexibility around it, but the government have been pretty strident that March 2026 is when they want to see this happening. And I think some of that's to do with the fact that they haven't necessarily viewed the first round of pooling as fully successful, because as I said, it was happening in—

[00:07:30]

Sophie: Unfinished.

[00:07:31]

Muirinn: Yes, pretty much. And so they want to set a pretty strict deadline for March 2026. I think in reality, there probably will be a little bit of flexibility around that deadline. So if you can show government you're in the process of doing so, or you know there are holdups which are preventing you from doing it, but your plan is to get there by—in a few months time. I think that level of flexibility we might see, but I don't think there's going to be wholesale flexibility whereby they're going to say: “Oh, it's fine if you don't do this for a year or two.” I think the reality is they want to see this change happening and they want to see willing from the sector that they are making these changes.

[00:08:09]

Tamryn: Yeah, that's right. And the one thing that we were talking about as well is on top of this, the pools are having to do more. So the pools are being asked to do more as part of the Fit for Future consultation. You think about SAA, the pools are now also having to deliver that as part of this piece of work.

So they are building out teams, building out offerings there for their partner funds.

[00:08:29]

Sophie: What's the focus like on UK investment for LGPS, Tamryn? I know this is something that we've spoken about a lot, particularly as it pertains to DC schemes, but is this a focus area for LGPS?

[00:08:41]

Tamryn:  Absolutely. And they've always—I think the LGPS has always had a focus on UK investments. If you think about the committee structure, you've got a lot of local councils involved. They always focused on what they can do for their local communities that they work in and serve in. And the government have also been focused on how they do that. To give you some numbers, I think there is an estimate of around £120 billion is currently invested. So that's about 28% of strategic asset allocations are allocated to UK assets.

[00:09:10]

Sophie: That's high.

[00:09:11]

Tamryn: Across sort of UK—across England and Wales. So that's pretty high. That is across the board. So that's both public and private. You can see already they do have a pretty big allocation there. When you look—and I think some of the government agendas think about levelling up—there's more of a focus on this on the private market side. And some of the numbers there are—I think there's about £18 billion across UK PE, so private equity and infrastructure currently invested across England and Wales LGPS partner funds. So I think it is a focus area for them. I think the government doesn't want them to do more.

[00:09:47]

Sophie: So Muirinn, on that. How does it compare to DC? We've had a lot of conversations about the backstop and the fact that it might become compulsory for DC schemes to invest in UK. How is it different, the language?

[00:09:58]

Muirinn: I think there is a slightly different view of the LGPS versus DC as in respect to this question. So as Tamryn said, the allocation in the LGPS to the UK is already quite high and there already is that kind of private market investment. Both with the UK tilt, but also more generally within the LGPS and that makes a lot of sense. It's an open DB scheme. They don't have the same sort of commercial cost pressures that we've seen in UK master trusts, which we've discussed before. They don't have the charge cap in the same way, so they've been able to make these investments over the longer term. And you can really feel this in the way that, for example, the minister spoke in the pension schemes bill committee stage.

He said the issue around DC investment is it's a bit of a collective action problem. So nobody wants to move first because they don't want to put their prices up and then in the market they lose out. That's not the same obviously in LGPS. And so the government hasn't felt the need necessarily to get as involved and certainly they have said, for example, there was a power which would allow them to get a little bit more involved in the strategic asset allocation, which they actually removed at committee stage.

[00:11:19]

Sophie: That's interesting. So the opposite view to what's happening in DC complications.

[00:11:23]

Muirinn: Yeah, and I do think they want them to do more. And so one of the things that is part of all of these changes is that the LGPS pools will have to set targets for local investment and then they'll report on those. And that's really to try and invest in that kind of local community. So that was actually one of the points that was consulted on. What does local mean? Does local mean in the UK or does local mean in the area where the pool is?

[00:11:49]

Sophie: But you're not—you wouldn't necessarily expect that to massively increase the amount in UK, it's more reporting on what's already—

[00:11:56]

Muirinn: I think it's an encouragement to go further and to do more very local investment. But to Tamryn's earlier point, this is already happening. And to the point around consolidation, the hope is as these sort of schemes become more consolidated, as they become more centralised, they can make larger allocations, they can be more strategic in those type of investments.

[00:12:18]

Tamryn: And you're starting to hear that already. A lot of the pools have already set up. So if you think about—not necessarily a pool—the GLIL, infrastructure programme, that is a coming together of a couple of LGPSs and it's focusing in on UK infrastructure.

[00:12:34]

Sophie: That's like a platform where they can all invest in UK infrastructure.

[00:12:38]

Tamryn: Exactly. So you have had that, you've had the London Fund from the London CIV, they have been working on that. So I think that there are already areas where there's the scope to do that. I think the government does not want more, as Muirinn said, and what they really—I think the pools are trying to work out now is how do you deliver real local investment when you are going to be a hundred-billion-pound pool? Like it's quite difficult. It might be quite challenging to find local investments at scale to deliver what your partner funds are looking for.

[00:13:07]

Sophie: That's really interesting because I think we often talk about the benefits of scale, but in this particular situation that might make it more of a challenge. So that's really interesting because that's potentially a negative of this kind of large scale, it might make it more difficult for these kind of local investments. But obviously the point of all consolidation is that overall, the pool should see great benefits to scale? Do you see that coming through already?

[00:13:33]

Tamryn: Yeah, I think that's right. I think that's really right. Particularly with the next round of consolidation, you're going to go from eight to six pools, so you'll have even more assets concentrated under fewer umbrellas, and this creates some of the largest pension investment entities in the UK. Some of these entities are going to be over a hundred billion. With that greater scale, the pools become more influential asset owners. I think we've seen a lot of benefits to date already. I think fee compression has been a really big factor.

But I think what you're going to see even more now is the pools being able to negotiate directly with fund managers, and maybe more particularly on the private market side, getting access to, maybe some co investment opportunities with bigger plays in those markets.

[00:14:19]

Sophie: So directly going into things, not having to access things through funds.

[00:14:22]

Tamryn: That's exactly right. And I think that scale gives you the leverage to be able to do that.

[00:14:27]

Sophie: A wider opportunity set.

[00:14:29]

Tamryn: That's exactly right. Yeah, that's exactly right. So I think that is a real benefit there.

[00:14:33]

Sophie: Is this similar to what we see in other countries, Muirinn?

[00:14:37]

Muirinn: Yeah. And so I would say, when we were talking about DC and what the government was trying to achieve, we talked a lot about Australia. I think as it relates to the LGPS, what the government's really thinking about here is Canada.

[00:14:50]

Sophie: That's the gold standard.

[00:14:51]

Muirinn: Yeah. So they're thinking a lot about the Maple Eight and—

[00:14:54]

Sophie: Isn’t that a great name?

[00:14:55]

Muirinn: It's lovely. And what they're able to do and how they're able to invest globally, but also the prestige that comes with having these massive pension funds in Canada.

And I think one of the big frustrations that you hear a lot from politicians is: “Okay, so why do the Australians and the Canadian pension funds own these big pieces of infrastructure in the UK?” So think bridges, tunnels, airports, a lot of these are owned by Canadian and Australian pension funds and I think the government really wants the LGPS to be able to be a player in those types of investments and to own things here in the UK.

[00:15:31]

Sophie: So it fits into the kind of growth agenda.

[00:15:33]

Muirinn: Yeah. As well as that prestige point, investing in things around the world.

[00:16:04]

Sophie: In terms of predictions, where obviously there's pooling, we're seeing more scale, consolidation. What do you think this market's gonna look like in 2030?

[00:16:15]

Tamryn: So I think that there's a feeling or a sense that whatever you’re doing in round two, you need to try and future proof yourself, that the government will likely come again and look at what further consolidation could happen and could come through.

[00:16:59]

Muirinn: The one thing I would say is the government have been very clear. They've said: “We will not go for another stage of pooling. We just—not in this parliament anyway.” They do not have plans to, they've already forced the LGPS to do a lot of work and they're very cognisant of that fact. So as we look to 2030, I think what we see now, the sort of six pools, is likely to be where we are in 2030.

As we think about a longer term, so as we look to 2040, when Tamryn said the assets are going to be around a trillion, I think as we get to 2040, we probably are likely to see a bit more consolidation, whether that's one, two, three, four, who knows? But I think it would be pretty understandable if at that point there's more of a conversation about what the structure looks like and is it working in practice?

[00:17:50]

Sophie: So more to come. The current focus is March 2026.

[00:17:53]

Muirinn: Yes, that's it. That's a lot to get dashed into all of their brains, I'm sure.

[00:17:59]

Sophie: And then from then on we can speculate about what will happen in the future. Thank you so much, both, for joining today. I've really enjoyed our discussion.

[00:18:06]

Muirinn: Thank you.

[00:18:07]

Tamryn: Thank you. Thanks for having me.

[00:18:08]

Sophie: Thank you for tuning in to today's episode. We really hope you enjoyed this discussion and please be sure to subscribe and join us next time.

Risk Warnings

Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested. Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy. Changes in the rates of exchange between currencies may cause the value of investments to diminish or increase. Fluctuation may be particularly marked in the case of a higher volatility fund and the value of an investment may fall suddenly and substantially. Levels and basis of taxation may change from time to time and depend on personal individual circumstances.

Important Information

This material is for distribution to Professional Clients (as defined by the Financial Conduct Authority or MiFID Rules) only and should not be relied upon by any other persons.

This document is marketing material.

In the UK and Non-European Economic Area (EEA) countries: this is Issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Tel: + 44 (0)20 7743 3000. Registered in England and Wales No. 02020394. For your protection telephone calls are usually recorded. Please refer to the Financial Conduct Authority website for a list of authorised activities conducted by BlackRock.

Any research in this document has been procured and may have been acted on by BlackRock for its own purpose. The results of such research are being made available only incidentally. The views expressed do not constitute investment or any other advice and are subject to change. They do not necessarily reflect the views of any company in the BlackRock Group or any part thereof and no assurances are made as to their accuracy.

This document is for information purposes only and does not constitute an offer or invitation to anyone to invest in any BlackRock funds and has not been prepared in connection with any such offer.

© 2025 BlackRock, Inc. All Rights reserved. BLACKROCK, BLACKROCK SOLUTIONS, and iSHARES are trademarks of BlackRock, Inc. or its affiliates All other trademarks are those of their respective owners.

MKTGH1025E/S-4943592

For professional clients only.

[00:00:00]

Sophie:

Welcome to PensionShip, the podcast series from BlackRock for professional investors, where we share expert insights and opinions on some of the key trends that are shaping the UK retirement market. I'm your host, Sophie Dapin, and I am very happy to be joined again by our regular guest, Muirinn O'Neill, who leads on policy engagement for retirement in the UK for Blackrock.

[00;00:24]

Muirinn:

Hi Sophie, lovely to be here as always.

[00:00:27]

Sophie: Great to have you back. And we are both delighted to also be joined by a new guest to the podcast. And that's Tim Hodgson, who leads BlackRock's DC business in the UK.

[00:00:37]

Tim: Hello. It's very exciting to be here.

[00:00:39]

Sophie: Welcome. We hope you enjoy it. I'm sure you will. So today, Muirinn, Tim and I are going to be delving into defined contribution (DC) pensions.

It's an important episode for lots of reasons. Firstly, most of our listeners will likely have a DC pension, but also the government have really honed in on DC pensions as a space where they want a lot of change and quickly.

So Muirinn, let's start. Can you tell us what change they have in mind and by when? And I can see that you actually have a timeline in front of you that looks very, very busy. Can you talk us through that?

[00:01:14]

Muirinn: Thanks, Sopie. And yes, I do have a printed timeline in front of me, and—

[00:01:17]

Sophie: You do your preparation.

[00:01:18]

Muirinn: Yeah, I take this very seriously. So I would say that there is a huge amount happening. It's kind of everything, everywhere, all at once for DC schemes over the next sort of five, six years.

We have some of those longer term pieces that we've talked about before. We have the value for money assessments coming in. We also have guided retirement provisions so that schemes will have to provide retirement income solutions for their members. We also have small pot consolidation. And then we have the things that came out of the Pension Investment Review, which we've discussed before.

So we do have the minimum skill requirements coming in by 2030. That's to be at £25 billion for multi-employer schemes.

[00:01:57]

Sophie: So this is where the master trusts have to be at £25 billion, otherwise they won't be able to continue.

[00:02:02]

Muirinn: Yes, the master trusts and the GPPs (group personal pensions). It's being applied at arrangement level. So if a scheme had kind of GPP and a master trust, as long as they were following a sort of same investment solution, they could be fine at £25 billion.

So that's the skill test. And then we also have the work around investment. So we have the backstop power, which is in the bill which I'm sure we'll get into in a little bit—

[00:02:24]

Sophie: This has been in the news. This is a private market—

[00:02:25]

Muirinn: Yes, this one has been the most contentious and the most controversial, and certainly the one that's being discussed the most. The backstop power, which will allow the government to make the voluntary commitments, which a number of schemes have signed up to. The Mansion House Accord, which is a voluntary commitment to make schemes invest about 10% in private markets, with half of that in the UK. The government is taking the power within the bill to mandate that if schemes are not living up to their voluntary commitment.

So that's a lot to happen in the next period. And I think within industry there's been quite a lot of, you know, reaction in terms of the amount of things they're going to have to do in the next period.

[00:03:06]

Sophie: So Tim, how is the DC market responding to this? Muirinn's mentioned there's a few kind of topical things around consolidation, private markets. What are you hearing?

[00:03:15]

Tim: Yeah, well I mean Muirinn talked about the next five years, but it's not like we haven't had lots going on over the last five or 10. Right?

[00:03:23]

Sophie: This is not new..

[00:03:24]

Tim: No. So I think we have seen—let's take consolidation first, right? Consolidation has been happening for a long time. So depending on your source, anything between 75% and 90% * of individual single employer trusts have given up the ghost and have moved into the multi-employer master trust space over that last ten years—

[00:03:44]

Sophie: That’s a big number.

[00:03:45]

Tim: So a big number. We have seen a lot of consolidation of the number of schemes moving into the master trust and GPP space. And so a lot of the reason for that has been the governance requirements over the last few years. Value for money is a very big one for people to focus on over the last—over the next few years—but actually versions of it have been existing over the last ten years or so. So, consolidation is absolutely happening at that scheme level. And I think something like 90% of DC members in the UK are now in some form of master trust arrangement. We've seen consolidation happen at that level. I think it's probably safe to expect consolidation now to happen and to focus on master trusts consolidating.

In other words, given the scale requirements that Muirinn referenced, there are going to be master trusts in play today who exist in the market, who are simply not going to get there. And so over the next five years, I think one of the interesting things will be to see who survives and who doesn't. And so I think that change will definitely happen.

And then I think you mentioned private markets, right?

[00:04:53]

Sophie: I did.

[00:04:54]

Tim: My other favourite subject.

[00:04:55]

Sophie: Consolidation and private markets, all that you hear Tim talking about.

[00:04:58]

Tim: My two favourite subjects. So the use of privates is happening. I mean, I think we're beginning to see that. There's been a lot of talk about it for the last five years, a lot of focus on how to get it done, and how to deploy capital markets within a DC environment.

I think that is exciting. It's a really kind of good next step for the UK DC market to think about private markets as an additional asset class, a different source of risk, different source of return for the portfolio. So, I do expect that to happen. And we know that again, as Muirinn said, there are specific targets, not least Mansion House, but also in the government's bill.

So I think that's a really positive step forward.

[00:05:45]

Sophie: And do we see examples of that in other pension schemes around the world?

[00:05:50]

Tim: Yeah, I mean, everybody's favourite reference point in the UK DC market is to talk about Australia. But the reality is the Australian market allocates on average that kind of superannuation model about ten times the proportion of a portfolio to private markets than we do today in the UK.

[00:06:08]

Sophie: That’s a lot.

[00:06:10]

Tim: And there have been, there have been implications of that, right? The last—if you take, I think it's the last ten years to last year—the average early stage investor benefited from that allocation to the tune of about 1.2 percentage points higher performance every year for 10 years. Now, one point—

[00:06:31]

Sophie:

And that's comparing the Australian retirement system to UK.

[00:06:34]

Tim: Yeah, to the average UK, DC kind of theme over the last ten years.

[00:06:37]

Sophie: And that’s because structurally they have a much higher allocation to private markets.

[00:06:40]

Tim: Yeah. The superannuation model started 20 years earlier than the master trust—earlier than auto enrollment even in the UK. So they've been doing it a lot longer, the pools of assets are a lot higher, the sophistication of those portfolios is much greater. And that 1.2 percentage point return difference every year doesn't sound a huge amount. But actually, over the course of a 30-plus-year career, you could be talking about a third as large a pot again for an Australian member to retire on.

So having access to it is absolutely a positive, I think, for the UK DC member.

[00:07:18]

Sophie: Now, one thing that has been attracting a lot of attention, the press and controversy in the space, is whether or not investment in the UK private market is going to be mandated by the government. Muirinn’s already kind of mentioned these backstop powers.

[00:07:33]

Muirinn:

Yeah, and that is the question. Should the government have the power to be able to tell asset owners how and where they should invest? And I think we remain concerned that any sort of hard regulatory requirements could conflict with a member's best interests. Obviously, as we've discussed, the government is planning to introduce a sort of backstop power, kind of 'comply or explain' power that they don't necessarily say that they want to use, but they will use if people are not meeting the voluntary commitments that they've signed up for.

I think our view on this is that it needs to be really very strictly limited and tightly defined, because otherwise we sort of risk a situation where the long term interests of pension savers is dictated by successive governments. And what I mean by that is currently, as drafted, the power can be used until the next Parliament. We don't know what the next government is going to look like, what their priorities are going to be. So that's quite a big power to hand to them. And that has been a lot of the concern within industry that, you know, this government might be saying that we’re only going to use this very sparingly, we don't want to use it at all.

[00:08:39]

Sophie: But the next government might—

[00:08:40]

Muirinn: The next government might have a slightly different view on things and giving this power away—it's a big power and so you can understand why within industry there's been quite a lot of concern. And at committee stage, we have seen a number of schemes giving evidence, and talking about their kind of concerns around this. And I think it's fair to say that we have seen a little bit of softening from government. When the minister was asked directly about this, one of the things he said was, 'We really only want to use this on a ‘comply or explain’ basis, and we accept that it might not be possible to meet some of these requirements because of market conditions. And so if a trustee says to us, ‘We did not meet our commitments because we couldn't and it wasn't in our members’ financial interests,’ then we would accept that.' That's a slight softening in position from where we've kind of seen when the bill was first introduced.

And so hopefully we will get to a place where everyone can be comfortable with how this power is going to be used, and it can be as tightly defined as possible. But I think we're on a little bit of a journey to make sure that everyone feels comfortable with where we land.

[00:09:45]

Sophie: And how much of this policy is only relevant to master trusts and not to the single trust DC schemes?

[00:09:51]

Muirinn: In terms of the government's policy agenda, it's been very focused at the multi-employer level. So you've heard a lot—

[00:09:58]

Sophie: This is where the majority—

[00:09:59]

Muirinn: Yeah, and I think they've had a view that with the introduction of the value for money regime, we are going to see a lot of single employer trusts come on the market because it is quite a robust framework and will require a lot of data.

And so their view is quite a lot of single employer trusts will actually end up in multi-employer schemes anyway. But aside from that, I think the schemes that are kind of left at the end of all of this, as we look beyond the next five years, the sort of bigger single employer trusts that are left, I think we'll start to see some move to have them meeting some of these requirements of our own private markets. But at the moment, I would say the regulatory focus for single employer schemes is just making sure they're providing value for money and those that aren't providing value for money going into multi-employer.

[00:10:50]

Sophie:

Great. Well, let's turn to the future. We've heard about consolidation, private markets, the backstop value for money, all of this by 2030. That sounds like a lot, but I'd like some predictions from both of you please as to what you think will actually happen in this time. Tim, we’ll start with you.

[00:11:07]

Tim: Fantastic. I'm notoriously bad at predictions. There's probably two or three areas that I'd call out and I think I've, you know, I've touched on them somewhat already.

I think the first one is we are going to see a consolidation—a reduction in the number of master trusts in the space. We'll continue to see consolidation into master trusts, and then we’ll continue to see consolidation between them and to a smaller number, which is exactly what the government wants, you know, smaller number of larger clients with larger pools of capital to build more sophisticated portfolios.

I think that that is definitely happening and will continue to happen. I do think the private markets allocations will come through. I don't think it's 100% clear where we're going to end up. But the government targeting and Mansion House talking about 10%, I'd be surprised if it stopped there, frankly. And I think, you know, when that happens is more of an interesting question to me than whether, and I think that the allocation to privates over the next five years, if the government get what they want, then we are talking about a big wall of money being available for UK private market companies, whether that's infrastructure, private equity, private credit.

So I think the timing of those investments, the style of those investments is going to be something to focus on quite closely. The headlines I think are clear. It's the reality of how it happens. And then the last thing I would predict, and I reference back to Muirinn talking about guided retirement. Actually, that's going to be a really important part of the next five years of DC is—you know, DC is relatively young in the UK, and so lots of people in DC are not at retirement point where if it's their only source of income, that's going to change over the next five and ten years. So the quality of retirement income solutions, how we help people spend money in retirement, not just save it and grow it, is going to be a huge focus and it is genuinely 50% of my life at the moment is talking about, 'How do we solve that better for the individual than we do today?'

[00:13:09]

Sophie: Okay. Muirinn, do you agree with Tim's predictions?

[00:13:12]

Muirinn: Helpfully, as always with pension conversations, I'm with Tim. We're always singing from the same hymn sheet. Yes, I do agree with most of what Tim said. I think just to build on that, as I mentioned at the start, I've got this timeline in front of me that the government published.

[00:13:28]

Sophie: The very busy one.

[00:13:29]

Muirinn: The very busy one that’s got so many things happening at once. And I think the reality is we're probably going to see a little bit more flexibility than this timeline infers, because if you think about the fact that schemes will, for example, having to be carrying out value for money assessments, setting up their guided retirement solutions, thinking about consolidating with other schemes, thinking about consolidating their defaults. It's so many things to do at once. And I think, to my point earlier about the sort of near kind of flexibility that the minister was showing when discussing the bill with the bill committee, I think there's likely to be a bit more flexibility about how some of these things are sequenced and what actually makes sense for schemes than is implied by what was published.

So I think we are likely to see a lot of change. And I do think that's going to happen over the next five, six, seven years. But I do think they'll probably be a little bit more flexibility than what is implied by everything that's been published. I mean, that's just a prediction, but hopefully that makes people feel slightly more comfortable.

[00:14:33]

Sophie: It does. We've discussed a lot today. There is definitely a lot going on in the world of DC across consolidation, private markets, retirement income. And there's a lot of change happening fast. Thank you both so much. I've really enjoyed discussing this with you today.

[00:14:47]

Muirinn: Thanks. Pleasure as always!

[00:14:49]

Sophie: And also thank you for listening and please do join us next time as we will be delving deeper into the world of local government pension schemes.

Risk Warnings

Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested. Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy. Changes in the rates of exchange between currencies may cause the value of investments to diminish or increase. Fluctuation may be particularly marked in the case of a higher volatility fund and the value of an investment may fall suddenly and substantially. Levels and basis of taxation may change from time to time and depend on personal individual circumstances.

Important Information

This material is for distribution to Professional Clients (as defined by the Financial Conduct Authority or MiFID Rules) only and should not be relied upon by any other persons.

This document is marketing material.

In the UK and Non-European Economic Area (EEA) countries: this is Issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Tel: + 44 (0)20 7743 3000.

Registered in England and Wales No. 02020394. For your protection telephone calls are usually recorded. Please refer to the Financial Conduct Authority website for a list of authorised activities conducted by BlackRock.

Any research in this document has been procured and may have been acted on by BlackRock for its own purpose. The results of such research are being made

available only incidentally. The views expressed do not constitute investment or any other advice and are subject to change. They do not necessarily reflect the views of any company in the BlackRock Group or any part thereof and no assurances are made as to their accuracy.

This document is for information purposes only and does not constitute an offer or invitation to anyone to invest in any BlackRock funds and has not been prepared in connection with any such offer.

© 2025 BlackRock, Inc. All Rights reserved. BLACKROCK, BLACKROCK SOLUTIONS, and iSHARES are trademarks of BlackRock, Inc. or its affiliates All other trademarks are those of their respective owners.

MKTGH1025E/S-4869801

For professional clients only.

[00:00:00] 

Sophie: Welcome to PensionShip, the podcast series from Blackrock for professional investors, where we break down what’s shaping the retirement landscape in the UK and explore the forces that are changing investing. I’m your host, Sophie Dapin, and I am delighted to be joined again by Muirinn O’Neill. 

[00:00:19] 

Muirinn: Hello, hello. 

[00:00:20] 

Sophie: Our resident retirement policy expert in the UK. And also, we’re both very excited to be joined by a new guest, Massi Delle Donne.

[00:00:28]

Massi: Great to be here. Thanks very much for inviting me.

[00:00:31] 

Sophie: And Massi leads BlackRock’s institutional client solutions in EMEA. Now today, the three of us are going to be delving into collective defined contribution - or CDC - pensions. In our last episode, Muirinn and I talked about just how many changes are coming to the world of UK pensions. Now, one of these changes is that the government will be finalising regulations that will extend the possibility of CDC to more pension schemes.

And that’s following the successful launch of the first CDC pension scheme in the UK in 2024. So today we’re going to talk about what CDC is, what these changes mean and the impact that we expect this to have on the UK retirement market. So let’s start. Massi, what exactly is CDC?

[00:01:17]

Massi: First of all, thanks for inviting me. It’s great to be here.

[00:01:19] 

Sophie: Pleasure.

[00:01:19]

Massi: CDC, the way to think about it is somewhere between DC and DB. And if you look at the three key areas, firstly on the contribution rate. In a CDC, it’s very DC like. It’s a defined contribution scheme. So both the sponsor and the employee’s contributions are defined and fixed. In terms of retirement though, it’s a bit more DB like where the retirement income is defined. There’s a defined pension. It’s a formulaic pension. That’s maybe a percentage of your salary for every year that you worked at your employer or some form that you know in advance. The key difference, though, from a DB is the CDC is not guaranteed. It’s a target. It’s highly likely you’ll get it, but it’s not guaranteed as you would have in a DB.

The third element is there is one investment pool. So this is quite different to a DC. It isn’t an age-related fund, or target date or lifecycle. There’s a single investment pool, which is the same investment fund for everyone.

[00:02:27] 

Sophie: So the individuals don’t have their own pot, which they individually track.

[00:02:30]

Massi: That’s correct. There’s a general shared investment risk across all the members and the retirees.

[00:02:37] 

Sophie: So overall, it’s sitting somewhere between DB and DC. It provides more certainty to members than DC in terms of a regular income for life. But it’s a target, not a promised income for life.

[00:02:49]

Massi: Correct. The idea is to have something which is a bit more DB, but without all the guarantees that you typically have in the DB scheme.

[00:02:58] 

Sophie: So Muirinn, we’ve had a lot of enthusiasm from the government about CDC. So why so much enthusiasm? And to that point, how does CDC fit in with their wider pensions agenda?

[00:03:10] 

Muirinn: Thanks, Sophie, and welcome, Massi. It’s nice to have another member of our podcast family. 

So yeah, there is a lot of enthusiasm for CDC. And I think when CDC first came to market, there was even more enthusiasm. I think you’ll remember the CDC was being seen as the great solver of all problems that the government was looking at.

So whether that be investing for economic growth, the adequacy challenge, anything around retirement income. CDC was being seen as a silver bullet. I think as we’ve seen the first scheme come to market and the sort of-people get more to grips with the regs, there’s been a little bit of a mellowing of some of that enthusiasm and now it’s more clear who CDC might be appropriate for and who it might not be. But that enthusiasm still continues. And you can see that in the fact that as part of the scales tests, which we discussed in the previous podcast, that we’re going to-

[00:04:06] 

Sophie: And just a reminder, Muirinn, what the scales tests are?

[00:04:08] 

Muirinn: So the scales tests are that by 2030, the government wants to see that all multi-employer schemes reach 25 billion Pounds. There’s a small carve out if you’re on a realistic path to 25 billion Pounds by 2035, but they really want to see a kind of large scale in multi-employer schemes. They have explicitly carved CDC out of that, so the CDC can come to market at a much smaller scale because they are really enthusiastic and believe in it.

[00:04:35] 

Sophie: They want to give it room to grow.

[00:04:36] 

Muirinn: Yes, definitely. And so I’d say there are three main reasons for this. So firstly, there is the ability to invest in productive assets which we see more in CDC than we do in traditional DC. There is the kind of retirement income challenge that they’ve been thinking about a lot. So as Massi said, CDC provides an income in retirement without retirees having to think about it and gives that kind of steady retirement income, which also gives them a level of longevity protection, which is something that the government’s really worried about. And then finally.

[00:05:08] 

Sophie: So just stopping people running out of money.

[00:05:10] 

Muirinn: Yeah. And I think they’re very mindful of the fact that, like, most people just aren’t equipped to think about their own longevity and work out how much they should be drawing down. So this provides a real solution for that without having to go all the way to DB. And then finally, it really helps with the adequacy challenge, given that we see - usually - greater return in a CDC than we have seen in a traditional DC scheme. So all of these together mean that the government is pretty enthusiastic about it. But I would say they’re slightly more realistic about what the market might look like.

[00:05:40] 

Sophie: Great. So this all sounds great in theory. We heard from Massi how it’s very similar to DC in that there’s fixed contributions, but we’re also hearing that you expect to have higher benefits than DC. So Massi, how exactly does this work? So it’s the same cost, but CDC members magically get better outcomes.

[00:06:01] 

Massi: Yes. Thank you.

[00:06:02] 

Sophie: It’s not magic.

[00:06:03] 

Massi: No, I’m afraid not. There’s no magic involved. That would be very exciting if we had that in the scheme. I think the way to think about this is that the benefits arise from that sharing of the investment risk and the longevity risk, and a good way to think about it is if we use a metaphor. In a DC, the way a DC would work is that you have a-you plant a sapling and this tree grows over time. And then in your retirement, you live off the fruit of the tree.

[00:06:32] 

Sophie: And it’s just one tree. It’s your tree.

[00:06:33] 

Massi: And it’s just one tree. It’s your tree. Whatever happens to the tree, that’s your experience. And that’s the risk of the DC. If the tree grows well and large and produces lots of fruit, you have a fantastic retirement. If it doesn’t, then you have a less fantastic retirement. And the other element of it, of course, is that you can outlive your tree. What happens if the tree dies before you do? But if you die before the tree runs out, you can pass on your tree to your estate. So that’s how DC - the traditional DC - would work.

In a CDC, you do also have a sapling, but you don’t own the sapling. You actually join a club, an orchard, where there’s an orchard of the saplings, and you don’t own a particular tree. You have to contribute to the club and to the orchard. But over time, when you retire, the club promises you a certain amount of fruit. Where does the-where is the benefit to the member? It means that you can be-ou can take a little bit more risk. So for example, if there was a super fertiliser that could really double the growth but has a 10% chance of killing the tree, in a DC, you’d be a bit concerned if you just had one sapling, because what happens if you are the 10% - that is your retirement pot? 

In an orchard, you can try it on a couple of trees. If it doesn’t work out, well, it’s not so bad. There’s a range of outcomes you can have, and so you can share that risk across the orchard. The other thing is, in a club, the new members join in all the time. So new saplings are being planted. So some trees don’t grow too well or something happens - there’s a storm in a particular year, you have time to recover because the saplings will catch up and will grow with you. And that is sharing that risk over time. 

So in general, you’re able to take a bit more risk. You’re less concerned about the immediate impact because you can spread anything bad over time. The downside of it, of course, is if the sapling that you had contributed to the club happens to be the one that’s really the fantastic one, you kind of have to share it with everyone. And so you don’t benefit from any windfall of growth.

In retirement, the other thing is you get your defined amount of fruit, and if you are lucky to be one of the long living ones, it doesn’t matter because of people dying early. You can benefit from their tree. On the other hand, if you’re unlucky and die early, you can’t pass on your tree to your estate. It has to stay in the-and that’s the-in a nutshell, that’s how the CDC works. You can see that as the CDC is the orchard, and you are sharing the investment risk across the membership. So everyone is sharing across-is taking the same pool, sharing the risk across that member.

[00:09:09] 

Sophie: So you’re able to take more risk in the investments, which over the long term should generate a higher return. And then as well as taking more risk, you can hold everything for longer because you don’t have to de-risk your portfolio in the same way.

[00:09:20] 

Massi: Correct. Because you’ve got new membership coming in and you can manage that risk over time. So that’s across membership and time. And the third element of that, of course, is that pooling of that longevity risk in retirement, where the people dying younger subsidise people living longer. But you don’t know in advance who that will be.

[00:09:37] 

Sophie: And, Massi, I know you’ve-you do a lot of calculations on this topic. Like roughly, what is the kind of quantum in terms of outcomes, like the better outcomes you can expect?

[00:09:47] 

Massi: The better outcomes we see are in the range of 30-40% better outcomes.

[00:09:51] 

Sophie: In terms of the end amount that you have to retire on. 

[00:09:53] 

Massi: Correct.

[00:09:54] 

Muirinn: I actually didn’t realise it was that high.

[00:09:57] 

Sophie: It is significant.

[00:09:58] 

Massi: It’s really significant. And it’s largely because of what you touched on, Muirinn, which is you can take on risk. You can look at things that have a lot more productive assets typically. If you look at the Dutch, for example, they have 20-30% in there. And the nature of the risk, you can also take is different. You don’t need that liquidity that you would in a normal DC, so you can afford to widen the scope of investments and the kind of returns that you can get.

[00:10:20] 

Sophie: That’s a really significant number that would have a kind of meaningful impact on adequacy.

[00:10:23] 

Massi: The other point to make is that the benefit of-which you touched on as well, Muirinn, which is essentially the scheme does it for you. You don’t have to worry about “What is the pension I can afford?” Someone does that. You just give them that. In some ways, that’s a disadvantage, because you don’t really have much say what comes in. But for most people, they really seem to prefer that benefit of someone doing it for them and giving them something reasonable and sustainable.

[00:10:47] 

Sophie: This is another really big theme, Muirinn, that you’ve mentioned before about reducing the number of decisions that people have to make around their retirement.

[00:10:54] 

Muirinn: Yeah. I think we’ve talked about before how most people just aren’t really equipped for that sort of decision making. There isn’t really the sort of framework for helping people to make those decisions at that moment in time. Obviously, we discussed before, we’re getting targeted support to help with some of that decision making, but there will still always be a gap in terms of what people understand about how long they’re going to live and in terms of make-and in terms of how much they want to think about how long they’re going to live in order to make those big decisions.

[00:11:23] 

Massi: Yeah, that’s such a big risk that I think people completely underestimate. And if you look at the populations, we always look at the expected life when you retire. But actually, realistically, a quarter of 65-year-olds would live beyond 90 today. And that’s a really long retirement if you think about it. There’s the “Are you sure you can manage that pot over that long period of time?”

[00:11:44] 

Sophie: So I mentioned earlier that currently there’s only one CDC scheme live in the UK, and it’s a single-employer trust. But the regulations are coming to introduce multi-employer. What exactly are the timelines for this and what impact do you think this will have on the market?

[00:12:00] 

Muirinn: Yeah. So unfortunately I do not have a wonderful metaphor. I’m going to have to work on my analogy. 

[00:12:06] 

Sophie: No orchard, no orchard. 

[00:12:07] 

Muirinn: No orchard. So we’ll see regulations in the autumn. But they won’t come into force until next year. And I’d say since we started to have this conversation about the regulations and the extension to multi-employer CDC over the last kind of year, there’s been a bit of a vibe shift, for want of a better phrase. I think if we look back, even the year when we were discussing CDC, people would say things like, “I can see how it works for a single employer.”

[00:12:33] 

Sophie: We can still use the metaphor, can’t we? A single-employer CDC is one or-no, one company has one orchard. A multi-employer is lots of companies in the orchard.

[00:12:42] 

Muirinn: Yes, exactly. Great to make that work for what I’m saying. Yeah. So there were a lot of people, I would say, saying “I can see how this works for one employer who might be used to DB going to CDC. That makes a lot of sense, but can’t see the use case as much in multi-employer schemes.” That is starting to fade away. And I think that dubiousness is fading away a little. I think if you go to industry events, there’s a lot more interest. And certainly from a commercial point of view, you can hear a lot more people talking about coming to market with a CDC solution. So I think we are going to see a lot more interest once the regs are-come into force next year.

[00:13:20] 

Sophie: So on that, I would like to get some predictions from both of you. And we can come back in a year or two and we can see who was right. What do you think is in store for this market? How many schemes? Is it going to go mainstream? Is it going to stay niche? What do you expect to see?

[00:13:34] 

Muirinn: Massi, do you want to be mystic Massi?

[00:13:37] 

Massi: Yes, I started off as quite a skeptic of this, and I’m a convert, so I have the enthusiasm of a convert. I think it’s going to go really big, really mainstream. As soon as we show evidence of how much better the outcomes actually are.

[00:13:52] 

Sophie: That 30-40% that you mentioned.

[00:13:54] 

Massi: Yeah, I think so. I think there’s a lot of talk about “The multi-employer will be for certain kinds of, let’s say, unionised workforce.” I think once the benefits are shown, there’s going to be a lot more enthusiasm across multiple different industries. And I don’t think this is just for a paternalistic sponsor or particularly unionised workforce. I think you can see the real benefits for almost everyone. And as people get a little bit more creative in terms of the benefits design and how that would work, and give more options in terms of at retirement, how much you can take out, the kind of retirement income you can get - 

I think it’ll be very positive and there’ll be a lot of support for that. I can actually see this as being a third of the market. Maybe one big-one or two big multi-employers or part of multi-employers really taking a very big proportion of that market.

[00:14:48] 

Sophie: Do you agree, Muirinn? Judging by your face, I’m not sure you agree with a third.

[00:14:54] 

Muirinn: Okay. So I never think of myself as a pessimist, and I’m certainly not in this case. I’m still very enthusiastic about CDC, but I would say it’s probably likely to be more 10, 15% of the market. Maybe that will scale up over time, but I do think the market moves quite slowly, and it does take quite a while for people to get comfortable with things. And I think I would be more comfortable saying the sort of 10, 15% rather than going for the full third.

[00:15:23] 

Massi: It’s nearly 100% in Denmark and they’ve got choices there. 

[00:15:28] 

Muirinn: Very good point.

[00:15:29] 

Sophie: Thank you both so much for your time today. So I’m now going to attempt to briefly summarise our conversation today. CDC pensions are designed to provide overall higher pension pots for life in a way that is easier for the member to understand. It’s early days, but CDC orchards could provide a really important part of the UK pension industry’s ecosystem.

Thank you so much to Muirinn and Massi for joining and thank you for tuning into today’s episode. We really hope you enjoyed this discussion, and please be sure to subscribe and join us next time.

Risk Warnings

Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested. Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy. Changes in the rates of exchange between currencies may cause the value of investments to diminish or increase. Fluctuation may be particularly marked in the case of a higher volatility fund and the value of an investment may fall suddenly and substantially. Levels and basis of taxation

may change from time to time and depend on personal individual circumstances.

Important Information

This material is for distribution to Professional Clients (as defined by the Financial Conduct Authority or MiFID Rules) only and should not be relied upon by any other persons.

This document is marketing material.

In the UK and Non-European Economic Area (EEA) countries: This is Issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Tel: + 44 (0)20 7743 3000.

Registered in England and Wales No. 02020394. For your protection telephone calls are usually recorded. Please refer to the Financial Conduct Authority website for a list of authorised activities conducted by BlackRock. Any research in this document has been procured and may have been acted on by BlackRock for its own purpose. The results of such research are being made

available only incidentally. The views expressed do not constitute investment or any other advice and are subject to change. They do not necessarily reflect the views of any company in the BlackRock Group or any part thereof and no assurances are made as to their accuracy.

This document is for information purposes only and does not constitute an offer or invitation to anyone to invest in any BlackRock funds and has not been prepared in connection with any such offer.

© 2025 BlackRock, Inc. All Rights reserved. BLACKROCK, BLACKROCK SOLUTIONS, and iSHARES are trademarks of BlackRock, Inc. or its affiliates All other trademarks are those of their respective owners.

MKTGH0925E/S-4779021

For professional clients only.

[00:00:00]

Sophie: Welcome to PensionShip, the podcast series from BlackRock for professional investors, where we share expert insights and opinions on some of the key trends that are shaping the UK retirement market. I'm your host Sophie Dapin, and I am delighted to be joined by Muirinn O'Neill, who leads on policy engagement in the UK for BlackRock.

Now, over the last couple of months, we have seen a huge amount of change in the world of UK pensions: a whole raft of new government reforms aimed at improving member outcomes alongside driving UK growth. Against this backdrop – and to quote you Muirinn, when we last spoke – there has never been a more exciting time in UK pensions than now.

So on that note, our goal for this episode is to take a look at the big picture, take stock of where we are today and what these reforms might mean for the future of pensions in the UK. So Muirinn, tell us what has happened and why all this excitement?

[00:00:57]

Muirinn: Thanks Sophie, and thanks so much for having me back.

There's nothing I love more than chatting about pensions policy, so I'm very pleased to be here. It is a momentous year in pension policy and there are really two kinds of factors that are driving this. So the first is – I mean, it's something you referenced in your intro – but obviously the Labour Party were elected last year and they promised a lot about economic growth whenever they came to power as a way to improve public services, to improve how much people are earning and basically to improve the lives of people across the UK.

But you also won't fail to notice that we are in a particularly fiscally constrained environment at the moment. So they aren't able to necessarily pull the same type of levers that the previous Labour government pulled or something like the Individual Retirement Account (IRA), which they had in the US, where they did massive levels of public investment.

So in that context, pensions has become a real focus area for the government and there's been a view that if they can help pension schemes to invest more productively in their view they might be able to bring about some of that economic growth. So that's the first factor.

The second factor is more structural. So we have a pensions market which is maturing. And even without the election and Labour coming to power, we probably would've had to think about how this sort of system is working and whether it's effective. We are just over 10 years on from the introduction of auto enrolment. We're about 10 years on from the first round of Local Government Pension Scheme (LGPS) pooling. And also we have a defined benefit (DB) market that looks completely different than it did five years ago in terms of funding level. So in that context, we would’ve had to think about how the system is working anyway. And there are initiatives like the Value for Money framework or guided retirement income or small pot consolidation, which were probably going to happen anyway and have been being worked on for the past few years.

[00:02:53]

Sophie: So of these two drivers – you've got the economic growth driver, and then as you're saying, just like a fundamental change in the pensions market structurally and the fact that it's maturing – is one of these drivers more important than the other?

[00:03:05]

Muirinn: Yes, very much yes. So, you can't fail to notice that growth is the imperative with this government, and I would say that growth is the most important factor here, and you can see that in the different initiatives and how they're being prioritised. So what's happening is that there are a number of initiatives like the scales tests in defined contribution (DC), and all of the work around in UK investment that are very clearly linked to the first, but even things that are linked to the second.

So as I referenced, the Value for Money regime is becoming more closely linked to conversations about economic growth. Similarly, the regulation for superfunds is something that we've been talking about for a number of years, and it's included in the Bill that the government has published.

But even the conversation about superfunds, which used to be about a possible other route for DB funds—

[00:03:57]

Sophie: That definitely used to be a more structural thing. Like, DB funds are maturing, what are the roots for them?

[00:04:02]

Muirinn: Yes, definitely. But now it's, Okay, yes, what are the roots for them? but also, Can superfunds invest in private markets? Can they invest more productively? Is that a possibility under superfunds? That's not possible in traditional DB. That's a conversation that people are having and so you can see how the first factor even on those more structural elements is coming into play.

[00:04:25]

Sophie: That's really interesting. I think it's also really interesting how quickly this has all come about. So the Labour government came into power in July 2024, and then in June 2025, we saw the Bill be published. I'm sure everyone will be very disappointed to hear that we're not gonna go through every single aspect of it in detail for hours. But Muirinn, can you tell us at a very high level, what are the key things in the Bill across DC, LGPS and DB pensions?

[00:04:53]

Muirinn: Yep, and as you say, there is an awful lot in there so I'm not gonna go into absolutely everything that's in the Bill.

[00:04:58]

Sophie: And we can in future podcasts.

[00:05:00]

Muirinn: Yes, and we will go into much more detail, yeah, in specific podcasts, but we're going to try and keep it light here. So yes, in DC, we are seeing both those more economic growth focused initiatives that I mentioned before that are part of the pension investment review. So things like the scales test for DC whereby DC schemes will need to be at 25 billion by 2030 in order to continue as well as the new backstop par, which will allow the government to mandate investment in private markets and in the UK if they do not feel that schemes are meeting their voluntary commitments, which has obviously gotten quite a lot of media attention—

[00:05:39]

Sophie: A lot of media.

[00:05:40]

Muirinn: —and has proven to be relatively controversial. And I'm sure we'll talk about that a little bit more when we get more into the detail. Alongside those more longer term initiatives—so we are also seeing in the Bill the Value for Money framework, as well as guided retirement income solutions, which will put a duty on trustees to provide a suite of retirement income solutions as well as a default. And finally, we're also seeing small pot consolidation. So it's a mix of the economic growth and also those structural initiatives that we talked about before.

In LGPS, we are seeing further pooling, so we will be moving from eight pools to six. We're also seeing new requirements around governance and also, on top of that, we have the new local investment targets, which LGPS pools will need to set and then they'll be expected to meet them.

And it's worth saying that both on LGPS and on DC, these initiatives are moving pretty fast. We will get more regs consulted on to get into some of the detail in the next year or so. Whereas the initiatives that are included in the Bill on DB, I would say are moving slightly more slowly.

So we have things like surplus extraction, which was included in the Bill, as well as a new regime for superfunds. And both of them were expecting consultation in 2027, 2028 before those sorts of things are up and running. So you can see there's a slight difference in how the government's approaching both DC and LGPS where we're moving very quickly and DB where we're moving a little bit more tentatively.

And some of that's to do with impact on the gilt market. But some of that's also to do with the complexity around DB and a feeling that DB is now back in a good position, having been in deficit for so many years and not wanting to do something that, like, ultimately upsets that.

[00:07:24]

Sophie: So is the focus now going to be entirely on implementing the Pension Schemes Bill, prioritising the DC and LGPS changes? Are there any other changes in pensions, which the government are likely to also be prioritising?

[00:07:36]

Muirinn: The Bill will be a major focus for the rest of the year, and we're likely to see quite a lot of debate as we get to committee stage, which will be in the autumn, and certainly around, for example, the backstop power. We're expecting quite a lot of conversation within Parliament and within committee stage.

[00:07:52]

Sophie: So the backstop power is mandation of investment?

[00:07:56]

Muirinn: Yes. Yeah. And I think there will be quite a lot of debate in the Parliament about that. So that will be a major focus. But on top of that, there are a number of other things also happening so—

[00:08:06]

Sophie: That aren't part of the Pension Schemes Bill.

[00:08:07]

Muirinn: That aren't part of the Pension Schemes Bill.

So we have the second phase of the pension review, which is focused on member outcomes, on adequacy, on minimum contribution rate, and also starting to think about the state pension and whether that's fit for purpose. The government has recently launched a Pensions Commission, which is going to look at these issues.

[00:08:25]

Sophie: And so there's been a lot of press around the state pension age.

[00:08:29]

Muirinn: Yes, exactly. The Commission has a lot longer. They are working on an 18-month timeline and they'll report in 2027, and we don't expect some of the changes that they're gonna bring about to come about until the next Parliament.

So that's a much longer timeframe. But that work has just kicked off. So they'll be consulting both formally and inormally for the rest of the year. So that'll be also a focus. Alongside that we have the extension of CDC to multi-employer schemes and that we are expecting regs for in the autumn. So that'll be a massive change for industry.

And then finally, we also have the FCA’s new regime for targeted support, which they have just published a consultation on, but we're expecting final rules toward the end of the year. And what that is in practice is it's a new regime which will allow financial services firms, including pension schemes, to have a completely different relationship with their customers than what they have now.

So in the UK we have pretty rigid rules around financial advice and guidance, and firms have not really been able to take what they know about their customers into account and be able to give them any form of tailored guidance or nudges or advice based on what they know about them. That is about to change, and that is what targeted support is. It will allow firms to give recommendations to their customers on a people like you basis. So they'll be able to put people into customer segments and then give them nudges or suggestions based on those segments. So for example, in decumulation, they might say, Sophie, someone like you, who is

X age, X years old—

[00:10:07]

Sophie: Not trying to guess my age.

[00:10:08]

Muirinn: Not trying to guess your age. And has X amount in their pension pot might think about drawing down at X rate or might give you a warning if you're drawing down too much or might try and guide you towards a solution that makes sense for you.

[00:10:20]

Sophie: And previously they haven't been able to. It’s been on the individual.

[00:10:23]

Muirinn: Yes. Yeah. And that's been a big worry for a lot in industry because they can see that people are coming to retirement and they're taking everything out and they're keeping it in a bank account. And so this will completely transform the kind of relationship that schemes are able to have with their members around accumulation.

So we'll see final rules for that by the end of this year with authorisations opening in March. So from April next year-ish, schemes will probably be able to communicate with our customers in that way. So that's a really big change and that's just one more thing that's happening this year.

[00:10:56]

Sophie: Just one more thing.

[00:10:57]

Muirinn: Just one more thing.

[00:10:58]

Sophie: I'm actually—I'm going to attempt to summarise everything now. So do, correct me. But—so we've spoken about the Pension Schemes Bill and there were changes across DC, DB and LGPS and then on top of that we're expecting change on Collective Defined Contribution and on targeted support. And then also over a slightly longer-term horizon on the Pensions Commission.

[00:11:20]

Muirinn: Yes.

[00:11:21]

Sophie: So just a little bit to do.

[00:11:22]

Muirinn: Just a little bit.

[00:11:23]

Sophie: So we will be unpacking these developments in more detail in future episodes. So if you found today's discussion helpful, please do subscribe and join us next time as we continue to explore the evolving world of pensions.

Thank you again to Muirinn for joining us.

[00:11:40]

Muirinn: Thanks for having me.

[00:11:41]

Sophie: And thank you to you for listening.

Risk Warnings ‌

Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested. Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy. Changes in the rates of exchange between currencies may cause the value of investments to diminish or increase. Fluctuation may be particularly marked in the case of a higher volatility fund and the value of an investment may fall suddenly and substantially. Levels and basis of taxation may change from time to time and depend on personal individual circumstances.

Important Information

This material is for distribution to Professional Clients (as defined by the Financial Conduct Authority or MiFID Rules) only and should not be relied upon by any other persons.

This document is marketing material.

In the UK and Non-European Economic Area (EEA) countries: this is Issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Tel: + 44 (0)20 7743 3000. Registered in England and Wales No. 02020394. For your protection telephone calls are usually recorded. Please refer to the Financial Conduct Authority website for a list of authorised activities conducted by BlackRock.

Any research in this document has been procured and may have been acted on by BlackRock for its own purpose. The results of such research are being made available only incidentally. The views expressed do not constitute investment or any other advice and are subject to change. They do not necessarily reflect the views of any company in the BlackRock Group or any part thereof and no assurances are made as to their accuracy.

This document is for information purposes only and does not constitute an offer or invitation to anyone to invest in any BlackRock funds and has not been prepared in connection with any such offer.

© 2025 BlackRock, Inc. All Rights reserved. BLACKROCK, BLACKROCK SOLUTIONS, and iSHARES are trademarks of BlackRock, Inc. or its affiliates All other trademarks are those of their respective owners.

MKTGH0825E/S-4726869

For professional clients only.

Podcast episode: The Changing Landscape for UK DB Pensions Schemes

Transcript:

Sophie: Hello and welcome to PensionShip, the podcast series from BlackRock for professional investors where we share expert insights and opinions on some of the key trends that are shaping the UK retirement market. I’m Sophie Dapin, your host, and I’m delighted to be joined today by Andrew Reed, Head of UK Pensions Relationship Management.

Today we are going to talk about the constantly changing landscape for UK defined benefit pension schemes. We continue to see funding levels improving and this is alongside the introduction of the new DB funding code and the recent focus on unlocking surplus funds for investment in the broader economy.

In short, there’s a lot of change that we’re witnessing right now – and we’re joined by Andrew today to talk about these changes and what it means for the industry. So first of all, Andrew, what are the different objectives that you see between different stakeholders in this market?

Andrew: Thanks, Sophie. Let’s start with an observation. How many times have you heard a pension scheme CEO or chair of trustees say, “In theory, my job is simple: to pay members benefits as they fall due. But in practice…” And then you get a list of the difficult issues of the day. So what I’d say is that underneath the simplicity, there are a whole host of other factors and sometimes competing objectives.

So let’s think about the major stakeholders: members, trustees and employers. Starting with the members, their primary concern is straightforward. They, quite reasonably, want the benefits they’ve been promised to be paid at the level they’ve been promised and on time.

No one would say no to a bit more through some discretionary increases, particularly if the member’s pensions aren’t fully indexed to cost-of-living increases – say perhaps the pre-1997 component isn’t indexed that way – and a member certainly will want security probably in more ways than one. The member won’t want to worry about whether the pension will actually become payable and they’d also like some protection for any dependents they have. Alongside this, the member may have some beliefs or investment beliefs, for example, sustainability.

The trustees will want to deliver on members’ reasonable expectations. A trustee would want to run the scheme in accordance with the trust rules, and all relevant laws and regulations, and have a very keen eye to members’ best interests.

The trustee would want to provide the benefits at reasonable cost, but it would want to avoid running too much risk in its investment policy to jeopardise the security of benefits. And as regards investment policy more generally, it’ll want to invest according to its fiduciary duty prudently, having regard to the scheme’s funding and covenant status, with adequate diversification, liquidity and making sure it accounts for all financially material considerations including ESG factors.

Sophie: And then the other key stakeholders, the companies? How do their views and objectives differ?

Andrew: Yes, they’ll probably want all of the above, but there will be some slightly different and perhaps competing objectives. A company will certainly want to give the members benefit security, through a well-funded pension scheme, but it does have other demands on its hard-earned cash. Many of these will be complementary to the trustee’s objectives.

For example, business investment, if done well, would enhance the employer’s covenant as regards to the scheme, but others will need balancing with trustee objectives. For example, if a large shareholder distribution is planned and the pension scheme is not well-funded and or the covenant is not strong, then there will need to be some discussions between trustee and company.

Sophie: I think one of the things that we’ve seen increasingly in the news in recent months, and that’s really piqued companies’ interest, is discussion around the use of trapped surplus. Can you tell us a bit more about these developments?

Andrew: Yes, of course. It’s nice to be talking about surplus: a few years ago we wouldn’t have been!

Sophie: Absolutely!

Andrew: So funding levels have improved. In fact, they’ve continued to improve as gilt yields and index-linked gilt yields have increased. So there is surplus to talk about, even against the most stringent liability measure of annuity buyout.

Another thing to think about is that we’re going to get more clarity on this soon, when the DWP publishes its response to its consultation on options for defined benefit schemes and the publication of the Pensions Bill.

So let’s step back a bit and think what’s behind the government thinking on surplus. As you mentioned in the question, Sophie, a key policy purpose is to unlock trapped surplus for investment in the wider economy and to fuel economic growth. The thinking behind this is that lowering the threshold for allowing returns of surplus would help in two ways. First of all, there would be more cash returned to employers to invest productively in the UK economy and also it could potentially encourage trustees and employers to take on slightly more ambitious growth-oriented investment strategies, which would then have a knock-on impact to further investment in the UK, both in infrastructure and in growth assets.

It’s important to put this into context with some numbers. The numbers are big: if a low dependency basis is used as a threshold above which surplus is released – and that’s what Rachel Reeves referred to in a business breakfast she had earlier this year – the pensions regulator calculated there could be some £160 billion of such surplus assets.

Sophie: You know, that’s a significant number that could potentially be unlocked. But of course, when thinking about trapped surplus, how do member outcomes come into this? Could that jeopardise the pension scheme’s ultimate purpose to pay out benefits to members?

Andrew: Yes. It’s very important that members get proper protection. We’d all want to make sure that members are protected, so there needs to be a sufficiently prudent liability measure that’s used to determine the assets that need to remain into the scheme. The one that seems to have been focused on is a low dependency basis.

Sophie: So you speak to a lot of pension schemes all the time, Andrew. What are you hearing? Do you think it’s likely that a lot of schemes will go down this route or do you think it’s too early to tell?

Andrew: I think it’s too early to tell at the moment until we get more detail on it, but I think a lot of schemes will consider it because they do have surplus and there are various ways that surplus can be used. It could be perhaps a cash refund to the employer. It could be used to pay for future contributions. Maybe if there’s a DC section within the same pension scheme, it could be used to increase member benefits. Perhaps a combination that’s acceptable to all parties.

Sophie: Absolutely. Something else that we’re really seeing in this market is the establishment of new solutions for pension schemes. So one example of this is pension superfunds, which took a long time to get off the ground, but we now see them live in the market and doing deals. So how exactly does a superfund work and what should we expect to see in this market?

Andrew: Yes, as you say, Sophie, superfunds took a long time to get going, but they are now beginning to print. So maybe a quick reminder of what a superfund is. Two features, particularly: the pension liabilities would split from the current company or there’d be a substantial change in their relationship and the liabilities would be transferred to a new pension scheme – and that new pension scheme is the superfund.

We have been talking about superfunds, but we’re only aware of one that’s been assessed successfully by the pensions regulator, which is Clara. Clara has trailblazed for a long time, so we ought to recognise that. What really helped it to get going in my view is the slight relaxation a few years ago of the funding requirements that the pensions regulator required for superfunds. And that meant that two sets of sums worked: the sums both to calculate the funding needed in the superfund, but also the return on its investment that a capital provider needs who provides capital to make the superfund happen.

Clara’s model is what’s known as a bridge to buyout, so the superfund runs on the liabilities in pensions land for a number of years and then we’ll transfer these liabilities to an insurer via bulk annuity purchase.

Sophie: So that’s all baked into the plan when a scheme goes into a superfund?

Andrew: Yes, very much – for Clara anyway. But good question, Sophie, because there’s another way of doing it, which initially the pensions regulator didn’t allow, but in subsequent update to its guidance does allow, which is the superfund running on indefinitely, in which case there isn’t a transfer to insurance land baked in.

Again, we’ll get further clarity on this when it’ll be fully legislated for within the Pensions Bill coming up, and then subsequent regulations.

Sophie: And another innovation that we’re seeing in this market, but perhaps at an earlier stage, is capital backed funding arrangements, also sometimes called capital backed journey plans. Can you tell us more about these?

Andrew: Yes. Let’s start with what they are. A capital backed funding arrangement or CBFA is a solution which either promises a particular outcome or a guaranteed rate of investment return. It’s backed by external third-party capital to underwrite the promise and the existing sponsor to the pension scheme is still around, so it remains adhered to the pension scheme.

Sophie: So that is different to the superfunds that you’ve just described, where that link is broken?

Andrew: Correct, yeah. That’s a fundamental difference between the two. Maybe to illustrate a CBFA, we can use the bridge to buyout example that Clara uses in its superfund model.

As you said, Sophie, big difference – the employer is still around, there’ll be the promised outcome in, say, five years’ time – is that there will be an annuity buyout.

The solution would be something like the pension scheme would put its assets in a vehicle. External capital would also be put into this vehicle. This vehicle would be invested.

Benefits can be paid out of the vehicle, but the external capital provider can’t take anything out of the vehicle until the outcome is secured, so after five years. The proceeds of that vehicle are used to buy an annuity – all the proceeds, so that’s both money the pension scheme’s put in, plus the capital providers put in.

Then any left over after the outcome’s been secured is returned to the capital provider. Clearly, what the capital provider hopes is that there’s a lot left and a lot more than it originally put in, so it gets a good return on its capital.

Sophie: Have we seen a lot of uptake with these kind of arrangements?

Andrew: There’s been a fair bit of interest, but to our knowledge there’s only been one trade so far. However, I think it’s quite an interesting space. If you consider the options that are available to a pension scheme if it wants to run on and the employer’s still around and it wants some external capital, at the moment it’s basically got only two.

First one is normal run-on: zero external capital. And the other one is to buy an bulk annuity as an asset of the pension scheme, which is loads of external capital. And wouldn’t it be nice to have an option or options in between those two extremes? And I think CBFAs can provide that.

So it’s certainly a space worth watching.

Sophie: So it’s been really interesting to discuss superfunds and capital backed funding arrangements as innovations in the market, but they are rarer. Run-on and buyout are clearly the more traditional options. The buyout market continues to thrive, but I’d say we’re definitely hearing more and more from clients who are interested in run-on.

Can you tell us a bit more about the different types of run-on?

Andrew: Yes. Let’s split the different types according to the themes that we are observing in the marketplace at the moment. The first one we’d point to is what we call the traditional model, where a CIO team or a consultant on behalf of the trustees will oversee several distinct investment mandates trying to achieve the trustees’ risk return objectives. These mandates could be with the same manager, or certainly in the past have been split between several, or in some cases, many managers.

In our view, though, there’s a trend to do more with fewer managers. An example of this would be combining LDI with one or other mandates, typically fixed-income mandates, into what we call integrated LDI. Here the LDI manager has power over the other mandates to subscribe from or redeem from them, although the other mandates would, of course, be run by portfolio managers who are experts in that asset class.

In particular, if the LDI manager needs to get cash quickly, they have the power to instruct selling the other strategies. As you can imagine, this strategy is getting a lot more popular after the autumn 2022 gilt volatility and the requirements on minimum collateral buffers.

It is a popular strategy. We’ve been appointed to some 25 new segregated, integrated LDI mandates since then, and now we’ve developed a pooled fund solution, so smaller schemes can get the benefit of this integrated LDI strategy.

Sophie: We’ve also seen a lot of growth in OCIO or fiduciary management arrangements, particularly as it pertains to run-on. Can you tell us more about conversations that you’ve had in this area?

Andrew: It’s not for everyone. For an increasing minority of our clients, they are looking at it very carefully. Under those the scheme delegates some or all of its investment function to a manager. That manager would make strategic and tactical decisions within agreed guidelines.

There’s a wide range of what can be done. For example, in some cases, the manager would also take the appointed advisor function under the Pensions Act 1995, whereas in others, a separate strategic advisor would be retained. But I think there’s one theme that applies to all of these models, actually, and that’s there is an increasing focus on governance, particularly after the volatility of autumn 2022, when governance models were tested, and all options are on the table now.

Sophie: We’ve covered a lot today, but if there was just one thing that you wanted everyone to remember from today, Andrew, what would that one thing be?

Andrew: Thank you, Sophie. For me, it would be that there’s no one size fits all solution. We would suggest that when looking at strategy, a client considers very carefully its objectives, takes advice from its actuarial, legal, investment and covenant advisors, gets input from its asset managers, of course, and then makes an informed decision on which option is best for it.

One thing, though: the menu could change. There’s impending legislation and consultation responses coming out and the menu of available choices could evolve in the future. So perhaps pausing for now is an option, too.

Thank you, Sophie.

Sophie: Well thank you so much, Andrew, I really enjoyed that. It was brilliant to get some of your views there. And thank you so much to everyone for listening.

Risk Warnings

Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested.

Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy.

Changes in the rates of exchange between currencies may cause the value of investments to diminish or increase. Fluctuation may be particularly marked in the case of a higher volatility fund and the value of an investment may fall suddenly and substantially. Levels and basis of taxation may change from time to time and depend on personal individual circumstances.

Important Information

This material is for distribution to Professional Clients (as defined by the Financial Conduct Authority or MiFID Rules) only and should not be relied upon by any other persons.

This document is marketing material.

Issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Tel: + 44 (0)20 7743 3000. Registered in England and Wales No. 02020394. For your protection telephone calls are usually recorded. Please refer to the Financial Conduct Authority website for a list of authorised activities conducted by BlackRock.

Any research in this document has been procured and may have been acted on by BlackRock for its own purpose. The results of such research are being made available only incidentally. The views expressed do not constitute investment or any other advice and are subject to change. They do not necessarily reflect the views of any company in the BlackRock Group or any part thereof and no assurances are made as to their accuracy.

This document is for information purposes only and does not constitute an offer or invitation to anyone to invest in any BlackRock funds and has not been prepared in connection with any such offer.

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MKTGH0525E/S-4521214

Hello and welcome to PensionShip, the podcast series from BlackRock for professional investors, where we share expert insights and opinions on some of the key trends that are shaping the UK retirement market.

I'm Sophie Dapin, your host, and I'm delighted to be joined today by Muirinn O'Neill, who leads on public policy for retirement in the UK. In today's podcast, we are discussing retirement income. So, what happens to your DC pension funds when you retire? Currently, there's a requirement for a default investment strategy when your DC pension pot is accumulating, but then when you actually reach retirement, the requirement for a default goes away.

However, that is about to change with the government introducing a requirement for a default retirement income. Now this is going to have really significant implications in a positive way, but it is going to require a lot of work and change. So, Muirinn, why now? Why is the government focused on making this change now?

Thanks Sophie, and thanks so much for having me. It's very exciting. A bit different from my day job. As you say, it's a really exciting time in retirement income. And I would say that globally a lot of markets, as we move from DB to DC, are kind of thinking about this challenge. Like what is decumulation going to look like, what's the best solution?

All the mature markets are sort of struggling at the moment. So if you think about the US, if you think about Australia, if you think about the UK, they're all thinking about this challenge. And it's interesting that even Australia, which is kind of often thought of as this sort of poster child for pensions policy here in the UK, is still sort of struggling with this problem, albeit from a slightly different angle as their problem is that people have too much money and they're not spending it. Whereas our problem is slightly different than that. But to your point, why now?

I think there's a number of things that are coming together at one time. Obviously we have, as I said, this move from DB to DC and we're going to at some point soon reach that cliff edge where people are coming to retirement with DC pots that aren't just ancillary to their DB pension, but are their entire pension.

And when do you expect that that's really going to come into effect?

Not for another 10,15 years we're talking about, but we need to start to get our houses in order and think about this challenge. So there's obviously that, which is front and center with a lot of policymakers' brains because at the moment, and it is partly to do with the fact that DC pensions are sort of ancillary, but a lot of people take their pensions and because of pension freedom, they take them fully in cash and then they put them in a bank account. About half of people at the minute fully in cash their DC pensions.

And that's a lot.

Yeah, that's a lot. And especially if they're putting it into a bank account, instead of keeping it invested, that's obviously a very suboptimal outcome. So that's something that they really want to deal with. But also I think there was a realization around the time of the guilt crisis that whilst a lot of the focus was on the DB pensions and what happened there, in DC, we had a situation where a lot of people who hadn't made any form of decision about where they wanted to go and were at the very end of an investment strategy ended up losing a lot of money. And I think that was something that really woke the pensions regulator up to this issue and the need for people to be in some form of solution when they reach retirement.

So all of those actors have come together. And the government is thinking about this a lot. There've been a lot of consultations, which we have responded to. And we are expecting next month, for a part of the pension schemes bill to include a duty which will be placed on trustees to provide a suite of retirement income solutions, either themselves or in partnership with another, and then also a default. And the default won't necessarily have to be a default that works for every single one of their members. But you know, it could be done on cohorts, but there needs to be a solution so that if someone makes no decisions at all, they then are defaulted into something. Other than that, the sort of details of what that might look like remain to be seen, and we'll probably see them in secondary regs, but we know that, for example, they're going to want some degree of longevity protection.

Because I think the other big fear here is people don't take advice. People don't know anything. It's a lot to figure out and, you know, to expect people to figure out how they can manage their longevity risk is a lot for a normal person, and so some form of solution that prevents them from running out of money is a big part of this.

So that's the kind of broad brush strokes of what that might look like. We probably won't get the full detail for a little while, but that's what we're sort of hearing from the government. So, by the time the majority of people have DC pension pots, which is 10 to 15 years, there needs to be a solution that works in the market.

And to be honest, this is such a significant change that actually a 10 to 15 year timeframe sounds about right.

Yeah. And I think on top of that, there are a number of other changes just sort of coming together at the same time. So the FCA is also looking at a new regime for targeted support, which gets at the problems around the advice guidance boundary.

So as you'll be aware, at the moment, only 8% of people in the UK take any form of financial advice¹, and many firms, because of how rigid the barrier between the two is, many firms are really worried about getting anywhere near the boundary, so they won't offer any form of guidance for customers. This has been identified as a massive problem in the UK.

So is that when people retire, only 8% get advice? Or is it in their entire lives?

Yeah, that's in general it's only 8%, but you know that the rubber really hits the road when you're thinking about retirement because it's the biggest financial decision people are going to make in their lives.

Absolutely.

Yeah. And so nobody's taking advice and they're just sort of doing it on their own, which again has been fine with a lot of people having some form of DB pot. Not a lot of people are going to wealth managers, that sort of thing. At the moment, it's fine. Looking ahead, it probably won't be fine. And so the FCA has identified that this is a big issue and they're going to introduce a new regime called targeted support. And what targeted support will allow firms to do is to use certain information that they know about you and then set you into a sort of cohort and then give you advice based on that.

So it could be at pension. If you think about your pension pot, it could be the size of the pot, what they know about you demographically, where you live in the country. Based on that, they'll be able to say, Sophie, based on what we know about you, here are a number of options for you. The two things together, the default solution and the suite of solutions.

Plus, this means that the role that firms are about to play in decumulation is about to be completely different because you know, at the moment a lot of firms are really focused on that kind of accumulation phase. This means a big focus is going to have to go towards, for example, the data they hold on you.

You know, is that clean? Is it being held in different places so that they can give you the best solution and try to default you into something that makes sense? So it's really going to be a big change for industry and it's a really exciting thing to happen. And I would say also that I think in Europe, the UK's really moving first on this, which makes sense in a kind of very developed DC market. So I think what the UK does is likely to have ramifications in other markets because they kind of really are at the vanguard here.

So this is, you know, a really exciting time. Like you say, this combination of more of a focus on advice and financial guidance as well as a focus on actually having the right kind of solutions in place should definitely lead to better outcomes. One of the areas I wanted to talk about with you was the idea of inertia.

So the idea that people kind of don't do anything with their pension pots, and actually in some ways that's been quite beneficial with auto enrollment, but as it comes into later life, it can be challenging. Really interested to hear your views here and how that's feeding into this discussion.

Yeah, it's one of the funniest dynamics, I think, with auto enrollment, that it's actually so successful that people basically don't think about their retirement at all. A lot of people don't even seem to realize that they're saving into a pension, whether they're invested or not, and in some ways that's wonderful because it means that auto enrollment is working and it's happening behind the scenes, but in another way it means that people are not thinking about how much they need to be saving, for example, they're not thinking about what their retirement might look like. They're also, I would say, not really alive to the fact that when they look at the people they know that have retired and they think, okay, well my retirement will look like my parents because they don't really know the difference between DB and DC. They're not aware of the fact that a lot of these decisions will rest on them. That it’s not just going to happen for them automatically. And so I think we are facing up to, in 10, 15 years, a moment of real clarity for a lot of people and probably quite a scary moment for quite a lot of people because maybe they haven't been saving enough, maybe they haven't given this enough thought.

So I think it's a great thing that the government is starting to think about this problem. But I would say the sort of other side of the coin, as well as these kinds of retirement income solutions, is thinking about ways to get people to see it a little bit more or to think about their pensions a little bit more. And perhaps that will happen when the dashboards come out, which hopefully should be in years to come. And then building a better whole picture of finances and savings and investment and retirement in one base.

Yeah.

And it would be great to see, you know, as pension dashboards mature, whether that is something that could be linked up with open banking, and you could have a whole look at your financial wellbeing. But there is an onus on government, on industry to try and wake people up a little in terms of their pensions and what that might look like because we are now all responsible for our own retirement incomes. And even in my own social life, I talk to people about their pensions all the time. I'm a delight at dinner parties.

I do too. It's fine.

But people are so unengaged and so unaware of what's going on and perhaps some of that inertia that's been successful in accumulation needs to be taken and applied to decumulation. It can't ever be exactly the same because you will have to make choices of course, but the more that some of this can be done in default, I think it will be better because it's a weird irony that you're completely in autopilot up until the point at which you retire and then you have to make all of the decisions yourself.

I'd like to talk a bit about annuities. So I think in a lot of what we're talking about there is this concern that currently there's too much responsibility on the individual to manage their retirement income. And actually this change to the default will mean that it's more incumbent on the company or the scheme to make sure that people aren't in a position where money runs out too soon and annuities might be a really important part of that.

Yeah. So I think annuities might be a really important part of that. CDC might be a really important part of that. I'm conscious we haven't talked about that yet, but I think some form of longevity risk management is going to be the answer here, and what that exactly looks like. I think we have to be relatively agnostic and I think one of the things that is most important that the government can do is be agnostic in the solutions that people provide. So I think it should be on firms to make that decision, but certainly annuities are definitely going to be a part of that. CDC could be part of that. And also I think what's interesting and exciting is we have to get to a place where perhaps the market as it currently stands isn't fit for purpose in terms of retirement income solutions. Maybe there are changes that need to happen in regulation, but the problem has been up until this point, one of the things that regulators would say, so if you spoke to the FCA, they would say, you know, they're not enough retirement income solutions in market. So we are not going to make certain changes that you want, for example, being able to get income from funds. They said there's no need for us to do that now because there's not the solutions. This starts to sort of tip that balance because there is going to be a big amount of demand and also a lot of innovation happening in the market, and perhaps that will lead to different regulatory changes. Hard to say what they are now, but it's an exciting time to think about the future.

So you spoke about longevity protection and annuities might form a part of that, or CDC. So I think CDC is a really interesting one I'd like to talk a bit more about. Now, CDC stands for collective defined contribution, and it is a type of pension scheme that falls between a traditional defined benefit pension scheme and your defined contribution pension scheme.

A collective defined contribution scheme offers you a target pension for life. So this is really different to defined contribution where you don't get a target or promised pension, but you have a pot of money that you can decide what to do with. Whereas in a defined benefit pension scheme, you get a promised pension for life. CDC sits in the middle giving you that targeted pension. And the way that it achieves that is that it has a level of pooling amongst members of the pension scheme, which is a lot more similar to defined benefit versus defined contribution, which is more individual. And we've been hearing a lot of noises from policymakers and government, and from pension schemes about the potential benefits of CDC, which are expected to give kind of overall better outcomes to members than your typical defined contribution scheme.

I'm really interested to hear your views on how CDC sits in the market and what kind of role it could play.

Yeah, it's really interesting and I think it's worth saying at BlackRock we've been really supportive of the introduction of CDC. We think it's really great to see such innovation in the UK market, and we have really been supportive of the extension, which we're now seeing to multi-employer schemes.

Originally, the regs just allowed single employer schemes. We're expecting draft regulation, which allows multi-employer CDC at some point this year. So we were very excited about that. As well as the potential for decumulation only CDC. We think it's a great solution and it's going to be a great solution for many employers.

We don't necessarily think it's going to be the right thing for everyone. I think when CDC first came out, because it was new and exciting, it was almost being sort of sold as the kind of answer to all of UK government's problems around UK investment, around retirement income. I think there's a more realistic view right now in terms of what CDC is and what it isn't. And I think there are many employers who it's going to be a really great solution for, and we're really supportive of those employers to do so. And I think it's really exciting what we'll see in the next five, 10 years as we see more CDC schemes being launched.

So you mentioned CDC in the form of a multi-employer decumulation only solution, and do you see this to be part of the kind of retirement income toolkit?

Yeah, I definitely think so. And I think that's the way the government is thinking as well, that there needs to be a suite of products that are available, so not just fixed income or annuity type products, but also a sense of longevity pooling and how you can manage that. It's funny, I was actually reading a book about tontines, which tells you a lot about what sort of person I am.

A great person.

Yeah, yeah, yeah. Really exciting.

But what was interesting about that is, , this is not going to be accumulation only. CDC isn't a tontine. But you know, there are kind of bits from our past which are almost, could be the solution for the future, which I always think is kind of funny and interesting, but I think accumulation only CDC has a lot of potential. I would say the government is at the beginning of the journey of figuring out what that might look like. I know they have a new person that's looking at that specifically. I would say we are much farther along in the kind of multi-employer CDC and that sort of whole of life CDC, and I think they're trying to figure out the parameters of what accumulation only CDC looks like at the moment. But certainly in the next hopefully five years, I think that is something that they will have figured out and there will be regs in place and hopefully will be in a place where someone is looking to launch one.

Brilliant. Well, we have covered so much today, but if you can just leave us with one thing, what would that be?

I think it's a really exciting time and I think certainly since the introduction of auto enrollment, well, just over 10 years ago, I don't think there has been as an exciting a time in pensions policy. I don't think there's been as much happening, and I think it's a really exciting time and I'm glad that the government is taking hold of some of these strands and thinking about the future.

One thing I would say is something I mentioned earlier about as we move forward, how can the government start to think about people's financial lives in a more holistic fashion and help them to do so. So what I was mentioning about pensions dashboards and open banking, whether you can bring some of that stuff together because we know, like anecdotally and ourselves, that you don't think about your money in different silos, the way that policy is kind of set.

But actually you think about it as kind of your bank account, your investments, your pension, you'll think about them altogether. And so the more in the future we can make that easier for people to do, I think we'll be really great. But certainly we're taking the right first steps and it's a really, really exciting time.

Amazing. Well, thank you so much for your time today, Muirinn. I've really enjoyed our conversation and thank you very much to everyone for listening. Thank you.

¹ FCA 16^th October 2024 A new approach to financial advice regulation | FCA

Risk Warnings

Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested.

Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy.

Changes in the rates of exchange between currencies may cause the value of investments to diminish or increase. Fluctuation may be particularly marked in the case of a higher volatility fund and the value of an investment may fall suddenly and substantially. Levels and basis of taxation may change from time to time and depend on personal individual circumstances.

Important Information

This material is for distribution to Professional Clients (as defined by the Financial Conduct Authority or MiFID Rules) only and should not be relied upon by any other persons.

This document is marketing material.

Issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Tel: + 44 (0)20 7743 3000. Registered in England and Wales No. 02020394. For your protection telephone calls are usually recorded. Please refer to the Financial Conduct Authority website for a list of authorised activities conducted by BlackRock.

Any research in this document has been procured and may have been acted on by BlackRock for its own purpose. The results of such research are being made available only incidentally. The views expressed do not constitute investment or any other advice and are subject to change. They do not necessarily reflect the views of any company in the BlackRock Group or any part thereof and no assurances are made as to their accuracy.

This document is for information purposes only and does not constitute an offer or invitation to anyone to invest in any BlackRock funds and has not been prepared in connection with any such offer.

© 2025 BlackRock, Inc. All Rights reserved. BLACKROCK, BLACKROCK SOLUTIONS, and iSHARES are trademarks of BlackRock, Inc. or its affiliates All other trademarks are those of their respective owners.

MKTGH0525E/S-4446695

Sophie: Hello and welcome to PensionShip the podcast series from BlackRock for Professional Investors, where we share expert insights and opinions on some of the key trends that are shaping the UK retirement market. I'm Sophie Dapin, your host, and I am delighted to be joined today by Gavin Lewis, head of the UK Institutional Client Business. Now in today's podcast we are discussing the Blackrock Read on Retirement Survey. It's based on a survey of 1000 UK defined contribution savers and it unfortunately paints a very difficult picture for retirement in the UK. We'll talk about why this is today. But first Gavin, could you please tell us more about why BlackRock has done this research?

Gavin: Hi Sophie. So yeah of course. So this is actually isn't the first time we've undertaken this this research. The last time we did it was probably about 4 or 5 years ago. And we do this because I think it's important to really understand, how people feel about retirement. I think in our industry, we kind of navigate towards data and information, and what is often missing is the voice of the actual client or in this case, the end member. So I think it's really important to factor those things into how we as an industry are thinking about the pensions industry, obviously, retirement and in this instance, and but also a lot has changed in that 4 to 5 year period. I mean, you know, think about it. The world is a very, very different place. So it's important to get an update, on those changes and how different, you know, generations and demographics feel. And on that point, we also have, new entrants into the pensions, market, which I don't think that when we did this research before, we would have factored their views in. So I think it's really important that, we capture how they think and feel, because I suspect that it will be very, very different from the way that we thought, you know, a certain generation would have felt, previously. So, yeah, it's critically important. And we feel that we need to find some way of connecting with different outcomes for, this, surveyed group.

Sophie: Thanks. Now, one of the areas that you mentioned about different generations, and this is actually one of the key areas in the report looking at the differences between different generations. I think I'd expected to see some difference, but I hadn't fully appreciated the extent. For example, I was surprised to see that Gen Z’s top priority was to just not have to engage with their pension at all, whereas other generations prioritize maximizing returns, which I kind of expected. Why do you think we see such differences between the generations?

Gavin: Yeah. So I think part of it is just the fact that they are in different places in their lives. So and often actually we always lump in Gen Z, and millennials into the same category. And actually you can see differences in the way that they feel about retirement. But there are some commonalities. So in those younger cohorts, I'm not sure it's their unwillingness to engage with pensions. But I think just in terms of priority, it just isn't as important as, let's say, you know, paying down student debt. If they have any or paying their monthly rent or saving for a deposit for their, for their mortgage. And of course, we've got the macroeconomic backdrop which makes this all the more pertinent. So for that generation, you know, they're certainly feeling the impact of the cost of living crisis. So it isn't that it isn't important. It's just that and in their priorities, perhaps it isn't the number one element. I think that's very different to for example, Gen X often called the lost generation because they kind of fell through the cracks of the closure of DB pension schemes and the realization of how much you needed to contribute to a DC pension scheme. And actually for them, it is, a much higher priority. But interestingly, even then, the focus for them is actually, Yes, you're right, Maximizing returns because for them, they realize that they may only have ten, 15, 20 years left to work. And perhaps if they haven't accumulated a lot, suddenly the specter of retirement isn't that far away. And the consideration for them is, okay, so how do I actually ensure that I will be and, can maintain a decent standard of living in retirement?

Sophie: So the survey shows that only one quarter of participants say that they feel on track for retirement. You know this is a very low number. Why do you think it's such a low number?

Gavin: Yeah. So it's interesting when you read the, survey results, about this, this feels like it's a common thread throughout all the generations, probably with the exception of pre retirees. So it's certainly worthy of greater, exploration. One of the issues, I think, however, is that we don't actually have an assessment or benchmark for what a good retirement outcome is for an individual. So, we put a lot of focus on, you know, investment returns and the makeup of a default fund. But the question is for an individual, what does that actually mean? I think a lot of it is more to do with the fact that people don't feel that they're, investing enough. And that's probably more to do with the contribution rate or how much they're putting aside or even are they looking at their statements? Do they understand how much is actually in their different pension pots because most people have more than one. So, it’s difficult to really assess whether people actually are or not as, as an individual.

Sophie: So people feel like they're not on track because it's difficult to measure being on track and therefore they don't know whether they are or not?

Gavin: Correct though, saying that what is clear is that actually we're not saving enough. Right. So the question really here is what is the quantum. What is the difference? So how are we, how far away from having different generations able to, retire comfortably? So, that is what I think we need to explore in greater detail.

Sophie: And are there things that the industry is doing to help people be able to measure what an on track looks like?

Gavin: Well, it's you know, the issue is that, when you think about an individual's retirement, it's going to be very, very personal because whether or not they have paid for a, mortgage or to pay their mortgage and to have a house or whether they have dependents or caring responsibilities, and then how much they actually have to contribute to their own retirement or a spouse in retirement. Those things are very, very personal. But I think what we've tried to do there is think about actually, how much should you be contributing. And what we do know, and what we can glean is that people not contributing enough. So that's the benchmark that we're using.

Sophie: All the things that we can learn from other countries about how to kind of encourage this good savings behavior?

Gavin: Well, it's an interesting point because obviously this, participant and survey is for our for UK investors. And I think there's a wider issue that this uncovers, in that, that we don't have, a culture of saving, and we don't have a culture of, of investing. So you can go to other countries, for example, if you go to the US, you know, everyone knows what their 401K plan is. And can probably tell you what it's invested in and with whom. Over here. You know, if you ask the average person who your pension provider is and how much is in your fund, they probably don't know. And there was some other interesting statistics around just how much the UK population has just sitting in cash, in savings accounts as opposed to actually being invested. Again, if you go to other jurisdictions. Again, I'm using the US is probably the biggest sample size. A lot of them will have their own personal investing accounts. It's normal. It's talked about and we just don't have that that culture here. So, it is something that I do think we need to change.

Sophie: So one of the areas in the report that I thought was really interesting was about how to encourage people to have, you know, emergency savings or sidecar savings. Could you tell us a bit more about this?

Gavin: Absolutely. So this is part of a broader question about what can be done to alleviate this. Savings challenge that we have. And interestingly, as an industry, again, I think we've tended to focus on like the investment outcome, or investment returns or the shape of a default fund, it’s a slightly different conversation, because here we're talking about, contributions and how to impact money going into pensions or into savings.

Now, the probably the first thing that one can do or one should do if you're in a workplace, offers a defined contribution pension scheme as an employee employer contribution that is flexible, it's to max out the ability to do that. So we don't, necessarily control that, but it's up to the individual to think about that. Now, one way to do it is to educate. And I think workplaces can do this via H.R. and benefits teams. But another interesting outcome of the survey data is that we also floated the idea of sidecar or liquid emergency savings initiatives, and this is off the back of, something that we piloted with, Nest Insights. And so, nest is a National Employment Savings Trust, and this was an emergency sidecar savings program where people would actually have access to a liquid savings account. And the concept and idea really, really appealed to many of the survey participants, but in particular Gen Z and millennials.

Sophie: So alongside your workplace pensions

Gavin: exactly.

Sophie: you also have your sidecar and that money is more immediately available to you.

Gavin: Exactly.

Sophie: Really interesting. If we kind of turn our attention towards those who are about to retire, we see from the survey that 76% of people who are about to retire say that they don't have a plan. Could you talk a bit more about why this is, and some of the ways that our whole industry is coming together to try and kind of solve for this?

Gavin: Of course. So, it's interesting because I think the industry as a whole has been so focused on accumulation. That we haven't paid enough attention to decumulation. I think that’s partly because when we think about who's going to be impacted most by the needs to actually spend in retirement, we think about generation X. But what's crept up on us is, you know, pre-retirees and older generation X, and even the baby boomer generation who are now on the cusp or, or at retirement. And what we realize is that we haven't innovated enough around deaccumulation or spending either. What the survey results did throw up is that the vast majority want some type of guaranteed income. They want the assurance and the stability to know that they've got income and it's going to last into their retirement. One thing which is really, really clear and even in more, I would say advanced defined contribution pension systems, if you take Australia, look even with them being ten years ahead of us, what we found is that people are still outliving their savings. So the people here also want something similar, which is I know how much I have, how much I'm going to spend and when to spend it.

Sophie: OK, so people are naturally cautious?

Gavin: Yes. Because look, they've you know, spent their whole lives accumulating, this pot of money they used to a regular paycheck, suddenly that paycheck is no longer there. And what they want is something similar. They want to know that at the end of each month, they know what they're going to spend. They know what's coming in, and they don't want to outlive their savings.

Sophie: And it's a big shift in the UK, isn't it? Because people traditionally have had that with defined benefit pensions and we’re now only just seeing this generation of retirees coming up and receiving the DC pension.

Gavin: That’s exactly it. Exactly it. The other challenge I think that we have is, how do you actually industrialize whatever solutions that we have. So there are varied the range of different mechanisms that people can actually utilize to actually spend. So as an industry, I think we have to think about, what is the most scalable by way of resolving this, this challenge. And it's something admittedly, that we are still as an industry wrestling with.

Sophie: So there’s a lot of data, a lot of numbers, a lot of statistics in the report. But if you could just take one thing away from the report Gavin, what would that be? Apart from telling everyone that they need to make sure that they maximize their pensions contributions.

Gavin: So, yeah, I think I'm going to be cheeky and give you two things. Look you know…

Sophie: Ok, that’s allowed…

Gavin: … it's not too much to say that we have, a retirement crisis on our hands. And I think when you read the report, which we encourage everyone to do, that's very, very prevalent. But I also think we need some perspective because, when we conducted this survey, even just five years ago, even getting people to engage with their pensions was a big challenge. You know, that's a huge hurdle that we've overcome, like all generations realize the importance and utility of a comfortable, stable retirement or retirement income. So that's a win. So I’d say how do we actually utilize this awareness, to drive the right solutions?

Sophie: Fantastic. Thank you, Gavin, and thanks everyone for listening. If you haven't already, I would recommend reading the report. Just search BlackRock Read on retirement or if you're listening from the Blackrock web page click below. We hope you join us again on another episode of PensionShip and don't forget to subscribe! Thank you.

Source: All data from Read on Retirement, Blackrock

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MKTGH0225E/S-4202777

Seun Fayoyin

Welcome back to the PensionShip podcast, our podcast series from BlackRock for professional investors here in the UK. I’m your host Sean Fayoyin. And in this series we’ll be sharing some more expert insights and opinions on the key trends shaping the UK retirement market. In today’s episode will be turning our attention to fixed income, which is playing a really critical role in UK client portfolios.

However, with increased uncertainty as a result of several different competing macro and geopolitical forces, which is leading to increased market volatility, the future path of interest rates remains uncertain and this has a natural impact on the fixed income investors. And so joining me today to discuss this topic are two senior strategists from BlackRock. We have Eric Rosado, senior strategist within the fundamental fixed income business, and Samuel Wellock, a senior LDI client, portfolio manager within the EMEA, LDI business.

Eric and Sam, it is great to have you on the show. Welcome to you both.

Eric Rosado

I’m excited to be here.

Sam Wellock

Me too.

Seun Fayoyin

Fantastic. So like I mentioned on the outset, fixed income is playing a more important part in client portfolios and I’m sure you’ll agree, but it’s been a bumpy ride, hasn’t it? After a decade of low growth, low rates and yields. Fixed income seems to be bouncing back into the spotlight. And so perhaps to start us off.

Can you sort of provide some context and frame sort of the current fixed income landscape as you see today? I think I’m going to come to you.

Eric Rosado

I think prior to jumping into the current fixed income backdrop, it is worth spending a moment just recapping how we’ve gotten to the place we have today within the fixed income market. So over 2022 and from much of 2023 global central banks in an effort to combat high levels of inflation delivered consecutive interest rate hikes.

The pace and the rate of these hikes were both unprecedented in nature and as an example, the bank rate in the UK went from ten basis points at the end of 2021 to 3 and a half percent at the end of 2022, and today currently sits at a rate of 5%, which is where we stand today.¹

So a significant historic move in interest rates, which again, ultimately if we think about the role in fixed income today being yield, your starting point looks very, very compelling.

And I think we’ll sort of diagnose and dig into the path for central banks moving forward. But I think could say that they’re largely adopting a data dependent approach moving forward. So, looking at specific measures of inflation within goods and services to determine the path policy moving forward. And I think what does that mean for us today?

It effectively means that when you look across the fixed income landscape to government bonds, credit other asset class, other sectors like securitized assets, the overall yield that you’re getting compensated for in fixed income looks incredibly compelling one. And as I think as our clients think about income as an outcome that we can construct, that income portfolio looks really interesting.

And I think there are probably three things that make the current environment unique to the fixed income landscape. So the first is that you can develop, you can essentially construct a real well-diversified portfolio that is high quality nature. And I think we define high quality in different regards. But when we talk about high quality, we talk about investment grade credit, so very high quality companies.

The second element around this is that when we think about where the most attractive opportunity lies within fixed income markets, thinking about a yield curve, large majority of that resides in the front end of the yield curve. So you can take you can construct a portfolio of high quality companies that are maturing in very short order. Overall level of interest rate duration are taking is low.

And then finally, you can essentially do that in a manner that is as global. So you can construct a portfolio of, you know, U.S., UK, European companies all in effort. And I think when you combine those elements together, I think it makes it a very compelling backdrop for fixed income. Yeah, I think that totally makes sense, particularly around that point around, you know, some of the central bank decisions being very sort of data dependent.

Seun

And the three points that you’ve just highlighted in terms of, you know, the unique opportunities here that we’re seeing within the market definitely resonates. Any other thoughts that you’d like to add to this?

Sam

Yeah, I guess I want to kind of counter some of the points that as well a little bit is just if we think about kind of fiscal position of a number of governments post COVID and also post the kind of cost of living crisis where we saw that kind of rapid increase in inflation.

And as a result, a number of things like public sector pay, settlements, etc., coming through means that a lot of those countries now face a pretty significant fiscal headwind. So, you know, record amounts of issuance and supply coming through, whether that’s through net issuance to finance the fiscal position or whether that’s through things like quantitative tightening. So I think there is some aspects there that become a consideration, particularly when you think about things like issuance in some regions where they’re seeing political change.

So we want to watch, particularly as we go through the next kind of 12 months where we’ve seen a huge amount of political instability coming through.

Seun

Yeah, that’s super interesting, Eric. Coming back to you, I think the markets have evolved quite significantly over the past recent years. How do you think the role of fixed income has also evolved and what do you hear from clients?

Eric

So I don’t think the core tenants of fixed income have changed in recent years. I think the asset class has always been thought of by investors as an area where you can achieve capital preservation, income and total return, I think, when thinking about those particular outcomes. So I think historically investors had to be quite careful and deliberate on how they would look to solve for those specific outcomes.

So as an example, prior to 2022, an investor is looking to solve for something like income, maybe had to move further down credit quality spectrum, invest in a broader opportunity set that would include things like emerging markets or ultimately invest in a solution that was designed to take a more tech sector approach to selecting specific income opportunities from a risk adjusted perspective.

I think that’s really in stark contrast to what we see today. We’re given higher overall yields in fixed income markets. As we’ve talked about previously. You can actually solve for the same income outcome by taking structurally less risk and through specifically investment grade corporate bonds. An additional reframing we’ve seen, I think within the fixed income market is around capital preservation.

So historically we’ve thought of government bonds as safe haven assets and indeed they are in circumstances where if there is a risk assets sell off the relationship between risk and risk free assets, i.e. government bonds are one that is inverse. However, we think this correlation has broken down in recent times. If we think about and if we think about 2022 and into 2023 as central banks raised interest rates, the mark to market prices on government bonds fell.

And so as a byproduct of that, when you’re thinking about something like capital preservation, I think DB DC schemes have to rethink about how they look to solve for that particular outcome. And one solution to that is to be delivered, but about how much duration you own within a portfolio and structurally where you run that duration. So if we’re thinking about ways to structurally limit the amount of duration or interest rate sensitivity you’re taking within a portfolio, investing in corporate bonds, let’s say they’re maturing in 0 to 5 years, exposure to structure, less interest rates than, let’s say, something that is maturing at 7 to 15 years.

So tying this ultimately back to the role fixed income can play in a portfolio, if you’re looking to solve for something like capital preservation, owning front end short dated credit is a way to solve for this. And ultimately, if we think about opportunities within the fixed income landscape today, if you’re just solving for returns, we think you’re essentially not compensated appropriately to own interest rates further out the curve.

And I guess that leads us to our other point, which is when we think specifically about opportunities within the fixed income market, we generally see investment grade credit as a as an attractive proposition. And when thinking about the attractiveness of an asset class, we generally think about it through three lenses. So the underlying health of that market or the fundamental backdrop, the attractiveness or expansiveness of the market, we think about that from as valuations and finally essentially the technical backdrop.

So the supply and demand for the underlying market. In summary, we think that companies are actually, you know, in a relatively good place. We see earnings, we see top line growth being fairly resilient and better than expected in some areas of the corporate bond market. however, we are cognizant of the fact that higher interest rates, higher inflation and perhaps maybe a more challenged economic backdrop can have a potential impact on company profitability.

We don’t think that’s widespread across the sector, but certainly thinking about more cyclicality, this is something that we are quite cognizant of. So expect divergent performance across sectors. in addition to that, if we think about the starting point for investment grade credit from a valuation perspective, whilst spreads, so this is the compensation you receive above a government bond yield widely known as the credit risk premia, while spreads look fairly expensive historically, Ultimately when you pair that with the all in yields received on corporate bonds, they still look very, very attractive.

Which brings me to my final point around the attractiveness of the asset class, which is the technical backdrop. We’ve seen a lot of demand for investment grade credit coming from investors who are effectively looking to lock in high levels of yield. And I think that is obviously something that we have highlighted and will continue to highlight throughout this podcast is that when you’re looking to build income portfolios, IG remains an area of the market that looks quite compelling.

Seun

And Eric Yes, I agree with everything you just said, actually, particularly when we think about some of the clients that I speak to that focus on investment grade credit actually resonates quite highly with a focus on high quality investment grade and income to be able to give balance within client portfolios. But also there’s the topic of sustainability, right?

That comes up in all the conversations that I have. I mean, what are your thoughts on that?

Eric

Yeah, it’s a great question. And frankly, it’s something that we’re effectively embedded within our investment process. How we think about a company today, how they think about addressing transition and commitments that they’re making towards meeting. For example, net zero ambition is fundamental in how we think about selecting an issuer.

So as an example, in carbon intensive sectors, we often think about companies who perhaps have a really strong emissions profile and have a track record of reducing emissions over time. But equally and more importantly, if they have plans to continue to reduce emissions in the future. So it’s integral in how we think about underlying credit selection. And I think over time, what you’ll find is that your ESG risk will just basically become a risk within a company’s profile

Seun

And so thinking about the clients that we serve in the UK retirement landscape and focusing on DB clients, when we reflect to the journey that DP schemes have been on in recent years, I believe there’s now a lot of discussion around and game planning with many schemes now in a better funded position relative to expectations. How essential is fixed income to end game solutions?

Sam

Well, I think it’s become front and centre. I mean, if we think about the history of DB schemes over the last three or four years, we’ve gone from position really driven by the fact that real yields have increased considerably where we’re now seeing record levels of funding. That’s obviously impacted by the impacts of real yields, but also shown performance underlying growth assets.

Now some of the aspects that I think are really coming through as part of that are really how schemes think about that end game. Now there’s kind of two, I’d say, predominant conversations that schemes are having, whether that’s to look to run on the scheme indefinitely for over a period of time or look to actually transfer that risk to insurance companies.

So do a pension transfer activity, a buy in, buy out. Now one of the things that’s put a bit of a spanner in the works is, is the announcement around the Mansion House reforms where we’ve seen a number of changes and policy changes which allow more flexibility of schemes moving forward, particularly when it comes to things like rental and how they can look to maybe access surplus going forward.

So many resources to consider that approach where that’s something that they want to think about rather than getting to the traditional routes of, of going to an insurance company for that risk transfer rates. Now, I think regardless of where schemes choose in that path, or through an insurance company or whether that’s going through to run on fixed income becomes an increasingly important component of that.

Now we think about the key aspects of that. If schemes are thinking to run on and they want to a low risk portfolio that’s built around delivering cash flows to meet member payments, but also one that helps ensure that scheme funding is relatively stable. So if we think about that, assets matching liabilities, a fixed income is a key component of that.

Secondly, actually, if schemes are thinking to go to something like risk transfer as an alternative route, then actually what they’re also doing is looking to want to build a portfolio that looks similar to that of an insurance company. So if you think about what insurance companies invest in, they typically have large allocations to fixed income, predominantly investment grade credits.

And as a result, we see more and more schemes look at as they go towards an insurance transaction, allocating more to things like investment grade, high quality credits that really underpins that and provides a kind of proxy for that insurance pricing. So really kind of both routes, whether it’s kind of run on or looking to go to risk transfer, require a pretty large allocation of fixed income.

I think that’s going to be increasingly important components. Now we’ve written a couple of pieces on this recently. We wrote recently a White paper which looked at running on and it’s called Keep the Plan. And we’re also writing other pieces as well as to how schemes can look at extracting that investment grade credit. But with the most efficient yields.

Sam

So we wrote a recent version of the ideas piece which looks at how you can purchase credit, particularly longer duration credits using LDI and integrating a single portfolio to make sure you pick up that yield, which gives you some attractive returns going forward. Yeah, no, thanks for that. So I think it’s pleasing to hear that investors have several different options as they think about their end game paths.

Seun

But it does feel like regardless of what options or what parts they decide to go with, there’s definitely a role for fixed income. But what about active fixed income as well? Do you think that there’s a role for that within such type of portfolios? 100%. And you know, I listen to a lot of the points that Sam has raised around essentially the asset liability management, around schemes, around the preference for, you know, building a cash flow profile.

Eric

And so I think when we think about schemes in this stage, it requires a high degree of customization, of course, a high degree of understanding requirement, effectively modelling around that solution. So if I think about the active management solutions that we have within fixed income, we’re very much tailoring to those specific outcomes. So I think active managers as a way to solve for an outcome.

There’s certainly a lot of merit to having an active manager essentially construct that portfolio for you. And then we were talking a little bit earlier about outcomes, specifically things like capital preservation, income. I think those are very much ring true for active managers as well. We can define capital preservation and a lot of different ways, but I think one primary way to think about it is how you manage credit deterioration over time.

So having an active manager have a process around the selection of an underlying company and also the management through that, through owning that bond, in an instance where, for example, risks begin to rise, there’s value for not diminished in preserving capital for client, likewise for income. As we all know, there’s been a very large move in yields over the last several years.

We’re actually seeing a lot of dispersion across various corporate bond sectors. So there’s certainly going to be opportunity for an active manager to pick winners and losers in the market over time. We’re talking a lot about central banks. We haven’t talked a lot about economic growth, but certainly we have a view that economic growth is going to slow down over time.

Thinking about what areas of the market that you own that are maybe a bit more defensive in nature, in line with that capital preservation or that income outcome becomes quite important. And I think ultimately there are specific areas where there are going to be inefficiencies within fixed income markets that active managers can ultimately look to exploit to perform or outperform a broader market.

Seun

Yeah. And so, Sam, sticking with the theme of end games, how have LDI Strategies evolved to support clients end game ambitions? It’s a really good question. So I think there’s a few things that particularly off the back of the kind of volatility that we’ve seen over the last couple of years. So one, I’d say key theme has been moving clients, moving away from this discrete hedging mandates or having one objective of marginal rates in inflation to actually a portfolio that looks to have a number of objectives that multifaceted.

Sam

So for example, having a risk objective and looks to manage hedging, but also things like default and downgrade, that’s really important in an investment grade by maintaining portfolio, but also then thinking about actually how you can generate some return. So what can you generate above gilts to earn that long term return that you need for whichever end game you choose, but also then thinking about cash flow, how can you ensure that your underlying pension is that you’re paying out?

And the memory requirements for a country perspective are met through your portfolio? So we’ve been seeing an increasing number of what we call integrated mandates, where you see those three components brought into a single portfolio. Now the other aspect of that I think is really important is that simplification of governance. So in an integrated fashion, what you see a simplification of is that governance framework that you have when you have things like increases in rates, which mean that you need additional class within LDI.

And what that has led to is typically things like LDI and investment grade Credit in the same place, but also the adoption of much more wider adoption of cluster waterfalls. So having assets that you can look to generate additional collateral if you need to within a relatively short period of time. So it could be something like shorter duration credit, it could be an ETF, for example, those types of different solutions available.

And then finally, I think one of the important things, though as well is that simplification of governance. So, you know, really we’ve seen this trend of schemes look to you for the fixed income allocation use one manager rather than multiple. And that really allows you to simplify that governance process. So when you face a class or call, for example, from let’s say an increase in rates, actually what you can do is that manager can manage that governance process for you rather than having to make a number of decisions that take a lot.

It’s a long time in that process, particularly for rates. So that’s something we think is really important. Finally, I’d say as well, the big focus around cluster resiliency. So two areas that are important. One is how you think about calculating, calculating collateral and post the gilt crisis has been lots of talk of how regulators apply that framework.

Obviously making sure you’ve got the right approach to manage that at the manager, but also how you can then utilize new tools, additional eligible class. Also, one of the things that we’ve been working on is utilizing credit classifier as we approach the new tool to turn segregated investment grade credits into eligible collateral to post against gilt repo transactions.

It helps you improve resilience, but also add flexibility in terms of managing that portfolio going forward. I think those are really the kind of key aspects I probably touch on from the integration perspective. Yeah, that makes sense. And that integration actually just when you were speaking about it, it makes me think about simplicity. Exactly. And just making that governance framework a lot more and less bothersome for clients, isn’t it?

Seun

Yeah, exactly. It’s right. Excellent. So we’ve spoken a lot about the retirement landscape from the lens of a DB investors, but as the landscape evolves, there is also a focus on DC schemes. And so how important is fixed income to DC clients and what role does this play within the space?

Sam

Yeah, so I guess with what we’ve seen in the last couple of years is DC becoming a much larger component of the pensions framework, So that’s given us significant growth and the accumulation phase is really starting to see to get some wind behind it.

And I think the one aspect that’s important there is as we as DC matures, you’re going to face more and more schemes looking to approach that pre-retirement phase or actually in some cases the accumulation. And as part of that, you know, fixed income is likely to form a strong component given it retirement solutions will require some income, but also pre-retirement will want to ensure that as you approach that retirement age, you have more certainty over what your income in retirement is going to be.

So making sure that your pot is less, let’s say, variable or sensitive to economic conditions. And it was maybe at the early stage of that accumulation phase. So I think is part of the industry evolves. We’re going to see far more use of fixed income as part of that pre-retirement and accumulation phase and how we think about them broadly.

Eric

So I think we’ve been seeing lots of clients look at those different areas and we’re seeing more importance, particularly looking at things like how you can think about inflation, how you can think about protecting against some of these move things moving forward. Yeah. that makes sense. Eric, any final thoughts to add? No, I mean, I would completely agree.

I think there are parallels to draw between how you think about the core outcomes and fixed income between DB and DC schemes, as Sam has highlighted. So I think the role in fixed income should very much feel similar when you think about those two specific retirement plan.

Seun

Fantastic.

Well, thank you, Eric, and thank you, Sam, for joining the podcast today. We hope to have you back at a future session and thank you to our listeners for listening and join us again sometime when we continue to discuss some of the key trends shaping the UK retirement market and don’t forget to subscribe.

¹Source: Bank of England, 2024.

Risk Warnings

Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested.

Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy.

Changes in the rates of exchange between currencies may cause the value of investments to diminish or increase. Fluctuation may be particularly marked in the case of a higher volatility fund and the value of an investment may fall suddenly and substantially. Levels and basis of taxation may change from time to time and depend on personal individual circumstances. There is no guarantee that any forecasts made will come to pass.

Fixed income risk Two main risks related to fixed income investing are interest rate risk and credit risk. Typically, when interest rates rise, there is a corresponding decline in the market value of bonds. Credit risk refers to the possibility that the issuer of the bond will not be able to repay the principal and make interest payments.

Important Information

This is marketing material.

This material is for distribution to Professional Clients (as defined by the Financial Conduct Authority or MiFID Rules) only and should not be relied upon by any other persons.

Issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Tel: + 44 (0)20 7743 3000. Registered in England and Wales No. 02020394. For your protection telephone calls are usually recorded. Please refer to the Financial Conduct Authority website for a list of authorised activities conducted by BlackRock.

Any research in this document has been procured and may have been acted on by BlackRock for its own purpose. The results of such research are being made available only incidentally. The views expressed do not constitute investment or any other advice and are subject to change. They do not necessarily reflect the views of any company in the BlackRock Group or any part thereof and no assurances are made as to their accuracy.

This document is for information purposes only and does not constitute an offer or invitation to anyone to invest in any BlackRock funds and has not been prepared in connection with any such offer.

© 2024 BlackRock, Inc. All Rights reserved. BLACKROCK, BLACKROCK SOLUTIONS, and iSHARES are trademarks of BlackRock, Inc. or its affiliates All other trademarks are those of their respective owners.

MKTGH0824E/S-3809688

TinaShe

Hello and welcome to pension ship blackrock's podcast series for professional investors in the UK I'm your host TinaShe and in this series will be sharing expert insight and opinions on the key trends shaping the UK retirement market we encourage you to subscribe to the series so they land straight on your podcast platform without you lifting a finger so onto today our focus is on a whole portfolio solutions as private investments grow and investment portfolios become more diverse having a consolidated view of risk and exposures because public and private assets is a growing challenge facing many investors we see a need for change in terms of how DC schemes think about their investment solutions to safeguard members retirement incomes and therefore super grateful to be joined by Tim Hodgson head of the UK DC platforms and retirement solutions business.

Hey Tim

Tim

Hey TinaShe

TinaShe

Right let’s jump straight in can you provide insight into the evolution of pension scheme portfolios specifically when it comes to increasing private market allocations?

Tim

Thanks TinaShe. It's been a really interesting time over the last five years to see how DC portfolios have changed and I think there's a couple of couple of things that are going on one is we've obviously seen huge growth in the asset base so are expecting to see huge growth going forward. I think that has led to and increase sophistication of portfolio design and I think that is particularly because we're considering more objectives you know we've got clients at different state different life stages of their life and so I think we're seeing at allocations become more sophisticated through the members life with more thought giving to the right allocations as people approach retirement and then move into retirement. We've also got more people at retirement age or approaching retirement age without a DB pension now so there is a lot more riding on the sophistication of these portfolios and what they're trying to achieve. I would also add I think we've seen an increase in the sophistication of the portfolios along the way so we're seeing much more precision in asset allocation all stages of that glide path where there are more tools being used and private markets is one of those and I think it's the next big thing.

The other thing I'd say is that we're seeing genuine kind of volatility in the market and we have seen that pretty dramatically over the last four years or so in many ways at the end of the great moderation as we talk about it a BlackRock, has seen a returned to this volatility and I think we've seen a need for trustees to really think about how they're diversifying risk each each part of that journey. The relationship between stocks and bonds has potentially changed and we may therefore need to be a bit more dynamic going forward. So I think you're seeing more dynamic more diversified defaults with better toolkits including private markets looking for a differentiated sources of return.

But I think we're also as I said a second ago we're seeing this demand managing defaults is more about more than about just risk in return at any one point it's about how the people manage that journey through their life and then into retirement.

So I think definitely more portfolio sophistication definitely improving asset allocation and now I think as a result whole portfolio solutions becomes a much bigger topic.

TinaShe

Thanks Tim. So it's clear then that more and more investors are transitioning to a whole portfolio approach to manage risk exposure and help bring new investment outcomes can you talk about the benefits and how you're working with clients to implement a whole portfolio approach to investment management?

Tim

So I think you know there's no question the UK pension system has been going through a period of transition but ultimately the goal of the pension system is the same the goal is to deliver better more sustainable, more secure income streams in retirement. That's what everybody in the markets here for so we've definitely seen investments move up the agenda, so whether that's for trustees or for consultants or indeed for asset managers but but ultimately for members I think thinking therefore about the design of defaults throughout that whole journey is critical and I think it's where we see a massive focus probably over the next 10 years or so.

Interesting I think outside the DC market so the sipp market we're also starting to see this it's it's going to be the case that for a lot of people their DC pension is their only source of income but for other people it will be DC or be a workplace it'll be or sipp it might be a ISAr so having good quality product and whole portfolio solutions that in those spaces as well I think is also really important.

When you think about the regulation that we've seen over the last few years but then there's a real focus on delivering better outcomes whether that's the value for money regulation by the DWP (Department for work and Pensions) or indeed the kind of current focus on retirement income and what's a good retirement income product and I think we're only at the beginning of that journey if I'm honest. But I think also we're seeing that across as I said a second ago the the DC and the sipp market and generating better secure income.

So how do we do it I suppose there's a number of answers but you know we've got over 25 years of experience of designing workplace plan design, DC plan design, whether that's a product like life path which takes you two and three retirement or indeed building great building blocks to allow other people to build great portfolios. Private markets I mentioned it earlier that is a really new and exciting area for DC investment it's not been a huge part of the DC portfolio before so getting the right product understanding it understanding how it fits in the portfolio is a really important part of the next few years

TinaShe

So pivoting slightly to climate change climate change introduces a different type of investment risk. So Tim based on our interactions how do long term investors like pension funds approach this topic?

Tim

I mean I would say this has been one of the key focus areas over the last five years if you go back to 2019 and kind of regulatory obligation to consider sustainability and climate change in your portfolio we've definitely seen schemes focus on it I think how schemes have focused on it has changed over that five years I think initially there was a kind of move towards replacing market cap index for example with some form of greener alternative but ultimately running a similar portfolio. I think we're now at a point where a lot of schemes and a lot of master trusts are building in top level portfolio objectives for climate change. I think the fascinating thing about that is how are they doing it and how are they measuring how they're doing and so that kind of need to justify and explain how you're doing and how you're going to deliver on the commitments you've already made is critical.

TinaShe

So before we wrap up any final comments on what we expect to find on the horizon?

Tim

I think some things don't change but as we've mentioned there's more sophistication coming and there is more sophistication in the process and there was a few years ago so I think ultimately it's about understanding what you're trying to do as a pension scheme understanding how you're expecting to do it and then now really importantly how are you doing against that objective you know how are we measuring that going forward so I think ultimately over the next few years we're heading towards better solutions more and better building blocks, better asset allocation, throughout the life of the member and indeed and really importantly better income in retirement.

TinaShe

Great thank you thanks Tim it's been great speaking to today and thank you listeners for joining us please join us again on another episode of pension ship goodbye.

Risk Warnings

Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed.

Investors may not get back the amount originally invested.

Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy.

Changes in the rates of exchange between currencies may cause the value of investments to diminish or increase. Fluctuation may be particularly marked in the case of a higher volatility fund and the value of an investment may fall suddenly and substantially. Levels and basis of taxation may change from time to time and depend on personal individual circumstances.

ESG Investment Statements This information should not be relied upon as research, investment advice, or a recommendation regarding any products, strategies, or any security in particular. This is for illustrative and informational purposes and is subject to change. It has not been approved by any regulatory authority or securities regulator. The environmental, social, and governance ('ESG') considerations discussed herein may affect an investment team’s decision to invest in certain companies or industries from time to time. Results may differ from portfolios that do not apply similar ESG considerations to their investment process.

Important Information

This material is for distribution to Professional Clients (as defined by the Financial Conduct Authority or MiFID Rules) only and should not be relied upon by any other persons.

This document is marketing material.

Issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Tel: + 44 (0)20 7743 3000. Registered in England and Wales No. 02020394. For your protection telephone calls are usually recorded. Please refer to the Financial Conduct Authority website for a list of authorised activities conducted by BlackRock.

Any research in this document has been procured and may have been acted on by BlackRock for its own purpose. The results of such research are being made available only incidentally. The views expressed do not constitute investment or any other advice and are subject to change. They do not necessarily reflect the views of any company in the BlackRock Group or any part thereof and no assurances are made as to their accuracy.

This document is for information purposes only and does not constitute an offer or invitation to anyone to invest in any BlackRock funds and has not been prepared in connection with any such offer.

© 2024 BlackRock, Inc. All Rights reserved. BLACKROCK, BLACKROCK SOLUTIONS, and iSHARES are trademarks of BlackRock, Inc. or its affiliates All other trademarks are those of their respective owners.

00:00:01:03 - 00:00:07:21

TinaShe
Hello, and welcome to PensionShip BlackRock's podcast series for professional investors in the UK.

00:00:07:23 - 00:00:30:02

I'm your host Tinashe, and in this series will be sharing expert insight and opinions on the key trends shaping the UK retirement market. We encourage you to subscribe to the series so they land straight into your podcast platform without lifting a finger. So only today our focus is on institutional use cases of exchange traded funds or ETFs. Is there otherwise?

00:00:30:02 - 00:01:04:06

Nine ETFs have emerged as one of the most transformative financial innovations of this generation. The advent of ETFs over 30 years ago equipped investors of all types with an efficient way to access a wide range of market exposures with liquid transparent execution, institutions have found increasingly innovative ways to integrate ETFs into their investment strategies, and a third of embracing ETFs, as they have repeatedly demonstrated that utility in challenging environments, given their deep liquidity relative to their underlying markets.

00:01:04:08 - 00:01:28:03

The purpose of this podcast is to discuss two of the most common use cases of ETFs optimizing cash flow management and efficient portfolio management. Now, to bring this to life, we will be hearing directly from two institutional ETF users who will discuss these use cases and the utility of these applications for their investment portfolios. So firstly, I'd love to introduce Jia.

00:01:28:05 - 00:01:51:22

Jia is a multi-asset portfolio manager in the Energy Treasury and Investment Office. The Energy Treasury Investment Office is a team of in-house investment strategists and fund a fund managers for Prudential UK with expertise in investment strategy, design, portfolio management and Manager Oversight. This is the team behind many of the Prudential funds, including the UK's largest with profit funds.

00:01:51:24 - 00:01:52:17

TinaShe
Hi Jia

00:01:52:17 - 00:01:53:20

Jia
Hi.

00:01:53:20 - 00:01:57:21

Nathan
Secondly, introducing Nathan Rollinson. Hi, Nathan.

00:01:57:21 - 00:02:00:22

team great to be here. Thanks for having me.

00:02:01:02 - 00:02:10:02

TinaShe
Thanks for joining us. Nathan is an investment manager at Avon Pension Scheme. Avon is a local government pension scheme with assets of around £6 billion,

00:02:10:02 - 00:02:22:03

Unknown
150,000 members and employers paying into the scheme ranging from unitary authorities like Bristol City Council to smaller parish councils and educational bodies as an open defined benefit scheme.

00:02:22:03 - 00:02:40:23

Unknown
Their investment strategy is by definition long term and this allows them to invest across a broad range of assets and funds. Sites kick things off. My first question when you think about integration of ETFs within your portfolios, what are your key usage considerations? So I'll start with Jia

00:02:40:23 - 00:02:50:01

As you know, asset allocation is crucial to portfolio performance together with how you construct your portfolio and the instruments used in your portfolio?

00:02:50:03 - 00:03:21:00

Jia
As a portfolio manager, I navigate two key considerations when it comes to utilizing ETFs. Firstly, there is no one size fits all answer each investor's circumstances, objectives, market timing and the product availability play an important role in determining how and when to incorporate ETFs in scenarios blending often seeking managers with indexing ETFs proves advantages, while in others relying solely on alpha seeking managers has better outcomes.

00:03:21:02 - 00:03:34:17

Unknown
Additionally, governance costs associated with identifying and monitoring alpha seeking managers also need to be considered. Some investors with limited budgets may keep their portfolios in index portfolios

00:03:35:05 - 00:03:38:19

TinaShe
Thanks you and over to you, Nathan. What are your key considerations?

00:03:38:19 - 00:04:02:16

Nathan
Yeah sure thanks ten So process. Yes relatively simple so we use ETFs for capital management purposes so the product needs to fulfil I would say four kiosks, the first one being liquidity and having a liquidity profile equivalent to cash. So there are situations where it will need access to capture very short notice.

00:04:02:18 - 00:04:26:14

So having to rely on something that takes days, weeks, sometimes even longer to liquidate is going to be problematic for us. Secondly, it needs to track our strategic benchmark closely with the huge selection of ETFs out there. Now. Yeah, that would be achievable even for those with the most diverse investment strategies. And then it needs to be low cost, right?

00:04:26:14 - 00:04:55:14

This is really critical for us. Seems low point of setting cash back with a high cost product. And again, the level of customization in ETF strategies meant that we could target a very specific fee load, which was great. And then I'd say last but not least, is the ability to to kind of set parameters upfront and then have a manage and run the mandate on our behalf, which at a BlackRock is carried out by the index asset allocation team.

00:04:55:16 - 00:05:07:06

So I'd say ensure liquidity is critical efficiency of implementation and low cost are the kind of key drivers for using ETFs within the pension fund context.

00:05:07:06 - 00:05:23:02

TinaShe
thanks, Nathan. So now we've discussed the considerations. I'm going to move on to the use cases. Having cash in a portfolio is a crucial component of managing inflows and outflows, but with that often comes cash strike and a movement away from deliberate asset allocations.

00:05:23:04 - 00:05:39:06

ETF Liquidity Solutions are essentially portfolios of ETFs designed to enable investors to set aside a portion of their portfolio to be liquidated quickly if the need arises. Aiming to solve the issue of excess cash without compromising on other investment objectives, returns or liquidity.

00:05:39:10 - 00:05:51:14

So back to you, Nathan. Avon have been invested in a liquidity strategy with BlackRock since 2019. What was the rationale behind this strategy for your scheme and how did you go about working with BlackRock on the construction

00:05:51:14 - 00:06:07:21

Nathan
Sure. So let me just just for a bit of context. First, maybe our private markets allocation has been evolving over the past few years, but 2019 really marked a step up in our allocation to real assets, particularly infrastructure.

00:06:07:23 - 00:06:31:22

And today our allocation to private markets equates to something like a third of total fund assets, a really sizable chunk of total assets under management. And then you combine this with a really capital intensive risk management strategy means that we need ready access to liquid assets. And this is really what prompted us to start talking to BlackRock about cash management solutions.

00:06:31:24 - 00:06:57:21

For us, divesting from equity or fixed income portfolios to fund cash flows wasn't always practical, particularly under pooling arrangements. And critically, we needed something that was going to mitigate the drag on performance from from just holding cash is, as you've highlighted in I mean, for me nothing highlights the use case for ETFs better than the the 22 Gilts crisis.

00:06:57:23 - 00:07:14:04

We run a leveraged equal portfolio, like many others, really felt the strain when yields spiked. So having access to a pool of liquid assets kind of helped us weather that storm and meant we were largely able to carry on as usual, where perhaps others who were less fortunate.

00:07:14:04 - 00:07:18:06

TinaShe
Yeah, absolutely. And how is that portfolio evolved over time?

00:07:18:06 - 00:07:28:13

Nathan
Yeah, I mean, we've been through several iterations with that team to ensure that the combination of ETFs that we're using are keeping pace with our strategic asset allocation.

00:07:28:15 - 00:07:56:08

So for instance, we've we've recently added a Paris aligned equity ETF and we use a combination of fixed income ETFs as a proxy for some of our absolute return investments. I'd maybe just say that with cash rates where they are, we may choose to hold a little less in ETFs and a bit more cash. But I think the point here is having a product that's nimble enough that you can adjust dynamically for the market conditions is is key.

00:07:56:08 - 00:08:09:16

TinaShe
Thanks, Nathan. Now while liquidity, please, a one way of utilizing ETFs, it's clear that more and more investors are utilizing ETFs for efficient portfolio management, such as a portfolio manager running several multi-asset strategies.

00:08:09:19 - 00:08:13:17

How have you integrated ETFs into your portfolio management processes?

00:08:13:17 - 00:08:30:01

Jia
Thank you Tin for this great question. We can discuss some examples of how institutional investors potentially can use ETFs, given that was application of higher years on offer and improved credit quality and fiscal strength of many emerging market issuers.

00:08:30:03 - 00:09:08:09

Emerging market debt, for example, allocation now exists in many multi asset portfolios. However, investing in emerging market debt faces many challenges. For example, idiosyncratic risk and unstable credit risk exposures. The beauty of using active managers are they can be more selective, avoiding companies, sectors and countries that face certain risks and challenges and take advantage of market inefficiencies. Active managers can also invest in off benchmark securities and use issuers that are often absent from the ETF investment universe.

00:09:08:11 - 00:09:35:19

However, not all endowments are conducted for alpha generation and active managers might have capacity issue to absorb large allocations in this space. The benefits of using ETFs are that they are traded or exchange. Provide transparent pricing and they can be implemented quickly. If timing is critical, we can use ETFs to access the market first while searching for active managers.

00:09:36:07 - 00:10:05:03

Jia
India is another example. India has been one of the fastest growing major economies over the past two decades. The income market has rallied since the COVID pandemic on the back of its cross-sector sector reforms maturing capital markets, favorable demographics, supply chain ships and the digitalization are all. India's extended election has triggered significant market volatility. The stronger of a longer growth story in India is still intact.

00:10:05:05 - 00:10:39:13

Still earnings growth also buffers market volatility. However, investors may face several complications assessing local Indian exposures directly. For example, investors must require a foreign portfolio investors license. So for investors who do not have a license but very keen to get into India, equity market ETFs can be an option. Using ETFs, Investor can directly access multiple Indian stocks in a timely and efficient way, and ETFs tend to be cost efficient and provide transparency.

00:10:39:13 - 00:10:51:17

TinaShe
Thanks each year and with the advent of private markets, I know that yourself and your team have used ETFs to complement some of your private market allocations. Can you talk to our listeners about how you've done that?

00:10:51:19 - 00:10:52:02

Jia
Sure.

00:10:52:08 - 00:11:32:10

One example we can discuss is how ETF can complement your estate allocations given its meaningful long term return, potential inflation protection and the diversification benefits. Real estate allocation has been an important building block for constructing multi asset portfolios. There are different ways to get exposure to real estate assets, either through private or direct real estate. All we can invest in real estate investment trusts, ETFs, real estate investment trusts have real estate cash flows by trade exchange and offer greater flexibility, lend direct to real estate, and they also pay out large part of their income.

00:11:32:12 - 00:12:02:12

In addition, direct real estate transactions can take considerable time to complete, and real estate investment trusts can complement real estate allocation. In the short term, however, investing in individuals can be time consuming and challenging in determining the best investment options rates. ETFs can be useful. In this case, it's ETF investing a diversified basket of routes, making it easier for investors to gain exposure to the real estate market.

00:12:02:14 - 00:12:18:22

Of course, ETFs offer several benefits, but they also count with some risks, including market sector and concentration risk. Large investments may need to consider transacting over multiday periods to avoid market price impact.

00:12:18:22 - 00:12:35:23

TinaShe
Thanks to you. Now pivoting slightly to our last section of the podcast, I want to talk a bit about sustainability. So at BlackRock we are seeing an increase interest in sustainable investment solutions with our clients and across the institutional landscape.

00:12:36:00 - 00:13:03:01

We recently conducted a survey of around 200 global institutional investors and 56% expect to increase their allocation to transition strategies over the next 1 to 3 years.¹ So sustainable investing and the transition to a low carbon economy have driven a greater adoption of customized solutions as investors seek to implement their own specific sustainable objectives, as well as a risk appetite index provide a preference and implementation preferences.

00:13:03:03 - 00:13:21:13

TinaShe
So my final question of the day to you both. With this increasing focus on sustainable investing and investors looking for solutions to support the transition to a low carbon economy, how ETF and index strategies are helping you to integrate these considerations into your portfolios? I'll start off with you, Nathan.

00:13:21:23 - 00:13:27:03

Nathan
Yeah, thanks. And look, this is a really critical area for us.

00:13:27:03 - 00:13:41:22

We've set a 2045 net zero target, which is highly ambitious and all stakeholders want to see that we're integrating ESG and particularly climate in every aspect of our portfolio. So short term, more tactical holdings included.

00:13:41:22 - 00:13:57:09

I've already mentioned the addition of the parts aligned ETF, but another kind of key advantage for us is the ability to monitor the strategy in terms of ESG scoring and carbon intensity and then to go on and use that information.

00:13:57:11 - 00:14:00:06

Nathan
And our Tcfd disclosures,

00:14:00:06 - 00:14:07:10

TinaShe
Thanks, Nathan. And Jia How ETF and Index Strategies helping you to integrate these considerations.

00:14:07:10 - 00:14:37:15

Jia
ESG considerations are reflected in M&G’s purpose. We've set ourselves the broader goal of embedding sustainability in our investment processes to help people live their lives they want. But while considering the impact on the world and continuing to deliver strong returns for shareholders and customers in the long term, we have a responsibility to consider ESG factors when we invest our customers money and to use our influence to encourage companies to do more to tackle sustainability issues.

00:14:37:17 - 00:14:55:03

ESG, ETFs and index strategies can be useful for liquidity and management and also help to screen out controversial business areas. Yes, ETF can be a very cost effective way to incorporate responsible investments into our portfolios.

00:14:55:03 - 00:15:00:07

TinaShe
Absolutely. Okay. Well, that takes us to the end of our podcast.

00:15:00:07 - 00:15:07:01

Thank you so much, Nathan and Jia, it's been great chatting to you about all things institutional usage about today.

00:15:07:03 - 00:15:15:03

And of course, thank you for our listeners tuning in to another episode of PensionShip and we do hope you'll join us again soon. Goodbye,

Risk Warnings

Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed.

Investors may not get back the amount originally invested.

Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy.

Changes in the rates of exchange between currencies may cause the value of investments to diminish or increase. Fluctuation may be particularly marked in the case of a higher volatility fund and the value of an investment may fall suddenly and substantially. Levels and basis of taxation may change from time to time and depend on personal individual circumstances.

ESG Investment Statements This information should not be relied upon as research, investment advice, or a recommendation regarding any products, strategies, or any security in particular. This is for illustrative and informational purposes and is subject to change. It has not been approved by any regulatory authority or securities regulator. The environmental, social, and governance ('ESG') considerations discussed herein may affect an investment team’s decision to invest in certain companies or industries from time to time. Results may differ from portfolios that do not apply similar ESG considerations to their investment process.

Important Information

This material is for distribution to Professional Clients (as defined by the Financial Conduct Authority or MiFID Rules) only and should not be relied upon by any other persons.

This document is marketing material.

Issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Tel: + 44 (0)20 7743 3000. Registered in England and Wales No. 02020394. For your protection telephone calls are usually recorded. Please refer to the Financial Conduct Authority website for a list of authorised activities conducted by BlackRock.

Any research in this document has been procured and may have been acted on by BlackRock for its own purpose. The results of such research are being made available only incidentally. The views expressed do not constitute investment or any other advice and are subject to change. They do not necessarily reflect the views of any company in the BlackRock Group or any part thereof and no assurances are made as to their accuracy.

This document is for information purposes only and does not constitute an offer or invitation to anyone to invest in any BlackRock funds and has not been prepared in connection with any such offer.

© 2024 BlackRock, Inc. All Rights reserved. BLACKROCK, BLACKROCK SOLUTIONS, and iSHARES are trademarks of BlackRock, Inc. or its affiliates All other trademarks are those of their respective owners.

Institutional use cases for ETFs

¹ BlackRock iResearch Services global survey of 200 institutional investors with US$8.7 trillion of assets. May-June 2023. Survey covered institutional investors’ attitudes, approaches, barriers and opportunities regarding transition investing.

Seun Fayoyin
Welcome back to PensionShip podcast series from BlackRock for professional investors in the UK. I'm your host, Seun Fayoyin. And in this series, we'll be sharing some expert insights and opinions on some of the key trends shaping the UK retirement market.

As always, we do encourage you to subscribe to the series so that you can get all the latest episodes straight to your podcast platform without lifting a finger. In today's episode, we'll be focusing on a recently published white paper which discusses the role that an outsourced chief investment officer, or OCIO, as they often called, can play in navigating different market environments. And I guess to add credence to this, the concept of outsourcing is actually one where we've been hearing a whole lot more from clients about as they look to capture opportunities presented by the markets.

And so joining me to discuss this topic are three experts from BlackRock whom I'm delighted to be speaking to you and co-authors of the white paper. I'm pleased to welcome Lara Edmonstone-West, senior member of the UK OCIO business team at BlackRock. Devan Nathwani, Portfolio Strategist within the BlackRock Investment Institute (BII), and Paul Sheffield, CIO for UK pensions. Lara, Devan and Paul, welcome to the podcast. It is great to have you on.

Right. So as you'd expect, I've actually read the white paper, which is really interesting and there's a lot to unpack there in terms of the role of an OCIO. However I'd like to start us off with the macro picture. So Devan, the foundation of BlackRock’s outlook for the past couple of years has been on how the great moderation is over and how we're now in a new market regime for investments. Can you explain what the great moderation is and summarise what this new market landscape is from a BlackRock perspective?

Devan Nathwani
Absolutely. Thank you Seun. As you quite rightly said, you know, we believe that we are in a new macro regime that is fundamentally different to the period known as the great moderation. And that was a relatively benign period from a macro volatility perspective.

In fact, we think that this new regime, this new market environment is one shaped by supply as opposed to demand. And by that I mean a supply side constraints. Now if you look at kind of the the story we've seen in inflation, we've had this dramatic run up in inflation, primarily driven by a series of pandemic related, supply constraints. Now, some of these supply constraints are resolving themselves of their own accord. So we're seeing inflation coming down, but others are proving to be a bit more structural in nature. So we think this new regime will likely mean more inflationary pressure for the foreseeable future and a more acute trade off between growth and inflation, particularly as central banks try to lean against some inflationary pressure, over that longer term horizon.

In terms of what this means for our outlook, there's three key themes that highlight here. The first is managing macro risk, so we think that this more volatile macroeconomic environment will mean more volatile markets. And so, investors need to pay a bit more attention to the macro risk they're exposed to.

The second is really steering portfolio outcomes. So clearly what I described is a difficult environment for clients. So you know, ultimately they'll need more expertise now more than ever. So I think this calls for a more hands on, dynamic approach to investing.

And then the final theme is really, harnessing mega forces. Now, these are essentially structural drivers of return. And there are five in particular that we track. The first, is the low carbon transition. So this is the idea that economies need to reorganise themselves to be less carbon intensive, which will create investment opportunities along the way. The second is demographic divergence, which is the idea that certain major economies have aging population, whereas others have, younger and populations and those with aging populations will see that as a headwind to their growth story. The third is geopolitical fragmentation. So, if you look at the news headlines recently, clearly we're in a more fragmented world geopolitically. We've got the war in Ukraine and greater strategic competition between the US and China. The fourth is digital disruption and the emergence of AI. So this is the idea that, you know, we think on the verge of a revolution that's akin to the industrial and information revolution. We think that, you know, this will have all sorts of investment consequences, particularly if we think, as we see, companies adopting AI technology and that result in winners and losers across industry. The fifth and final mega force is the future of finance. And this is the idea that, the disintermediation of banks is speeding up, in our view, in the face of higher rates and the emergence of digital currencies and tokenisation.

So yes, a lot going on in this new macro environment.

Seun Fayoyin
Yeah, absolutely. I was going to say that it's quite a lot for investors to kind of consider, in this new market regime. But I quite like the way you've talked about things from mega forces perspective, because some of the key themes that you mentioned on there are quite prevalent in some of the conversations that we're having with clients. And I guess, Lara, coming over to you, but this new regime at play obviously there's a lot of uncertainty and so the demand for outsourcing continues to grow, and investors are turning to OCIO. But actually BlackRock has been in the OCIO space for quite a long time now. This is isn’t new to us. So can you talk to us about this?

Lara Edmonstone-West
Absolute. So, BlackRock started managing assets on a fiduciary basis all the way back in 2005. And this is when we take on responsibility for a Dutch pension scheme. And of course, we're super proud that they remain the client of BlackRock today. There has absolutely, you are right, been a large focus on this growing trend on OCIO in the UK.

It's not new. It's been around since the noughties. It was often termed FM back there, and actually there is a little bit of nuance between FM and OCIO, but we are going to stay firmly in this podcast on OCIO. But what's interesting and we'll touch on this, is we are also seeing growing appetite outside of the UK, the US for example, and also all the way out towards APAC. But what are the key drivers for why somebody would use and OCIO. So historically, I’ll stay slightly in my world for a minute^, the defined benefit or the DB pension scheme world, trustees have increasing regulation on their plates, they've got additional responsibilities. And it also goes all the way through to cost transparency. Do I actually understand what paying for and what I'm getting? There’s been some great milestone in the industry, and I’m just going to pull out a couple of these. June 2021 British Airways Pensions announced BlackRock as their OCIO. Significant mandate in the market and it has led to BlackRock managing those DB pension benefits for over 85,000 of their scheme members and their beneficiaries. They were quite shortly followed after by the Royal Mail Pension Plan into BlackRock. So here we manage around 9,000,000,000 of their pension scheme assets in that OCIO world. Slightly higher number of numbers here, we’re touching on pensions for120,000 people. So big numbers here but what's really interesting, so I touched on the US, I’ve touched on APAC. But also we're seeing increasingly discussions with multinationals. So we're talking here about corporations who are starting to look at their global pension liabilities and understanding how outsourcing can help them streamline what they do, and then I’m going to come back this to right at the end, but what's really exciting is the traction that we’re seeing into different client segments. So, family offices, insurers, foundations and endowments. So going all the way back to your question Seun. There actually is a huge demand for outsourcing and hopefully through this podcast we can touch upon some of those areas.

Seun Fayoyin
Fantastic. Thanks for that. Quite a few big key wins, that you've mentioned with the British Airways and Royal Mail and but I guess it's fair to say that OCIO is not just for the large clients right? There's a spectrum of clients that this can be, applicable to. And so, Paul, coming over to you and reflecting on the white paper, you talk about three key themes in there; one steering portfolios, two managing macro risk and three, harnessing mega forces, starting with the first theme. How is BlackRock steering portfolio outcomes for its OCIO clients today.

Paul Sheffield
Yeah. So I think steering portfolio outcomes is going to be critical in the environment that Devan has spoken to. I think we're in for a bit of a bumpy ride. And when we think about steering portfolio outcomes for our clients, we look at it through three key levers. So the first of which, is the strategic asset allocation. So that's on average your long term asset allocation to equities, bonds and alternative assets. The second of which is tactical asset allocation. So that's how you adjust your portfolio, to take into account information over the shorter term. And then the third of which, is through manager selections, so which managers are you going to choose to implement your strategic asset allocation.

So taking each of these in turn. So we think that having a well-diversified strategic asset allocation is going to be the bedrock, of the portfolio, that you build, especially in the context of a much more choppy environment where we expect inflation to settle a little higher than perhaps what the market's expecting. So what does that mean from an asset allocation point of view? We like index linked bonds, we think equities are well placed to absorb higher levels of inflation, but we think that there's a real need for diversifying the portfolio such as alternative assets. Think hedge funds, think private markets.

In terms of active management, so from a tactical point of view, we don't think that investors are being rewarded properly for holding longer dated bonds. So, we think that they're looking more expensive. So we're underweight, long dated global government bonds. But we like equities, because we think that the environment at the minute is supportive of growth, especially in Europe rather in the US. So headline we’re underweight, global government bonds and were overweight equities.

And then finally managed selection. We think that in the type of environment that we're in, it's a fertile breeding ground for a good active manager to deliver excess returns for the portfolio. So to summarize, we think well-diversified strategic asset allocation, stay nimble, so that you can react to the market environment as it evolves.

Seun Fayoyin
Thanks for that, Paul. very insightful. And so sort of linking that asset allocation piece to the second theme, which is managing macro risk. Do you want to elaborate on that a little bit and talk about what this means in an OCIO context?

Devan Nathwani
Yeah. No, that's a good question. So I would use two examples here. The first is the story with inflation. So I mentioned earlier that inflation is falling, and towards the end of last year if you cast your mind back, you know, there was a lot of excitement in the markets around the prospect for central banks cutting rates going forwards, particularly in 2024. So much so, that at one point, markets were pricing in, to the tune of seven cuts for 2024 in the U.S that is. You know, that's quite an extreme environment if you think about it. Now, if we think about our view, at the time, our view was really that, you know, we disagreed with the market, we thought that the rates would likely stay higher for a bit longer, particularly given the sticky inflation we were seeing driven primarily by the services side of inflation. And then if we fast forward to today, and you think about sort of the recent inflation prints we've had, a lot of that seems to suggest, that the disinflation process, the falling inflation process, seems to have stalled somewhat. So all of this to say that, you know, clearly having an edge on macro insights, is quite important in this current environment. So when you're thinking about your OCIO provider, I think that's that's going to be crucial going forwards in this new regime more than ever.

So that was the first example, the second example, which is from the capital market assumptions that BII, maintain and provide to Paul's team actually. So, if we think about what we're seeing in the assumptions we produce and look real returns, what we're forecasting in the next ten years is lower real returns relative to the kind of experience of the last ten years. And, you know, that makes sense intuitively, given that inflation is higher, etc. Tut for some investors, that could be quite a complicated environment. So, particularly those that have a specific targeted return, if you're targeting 3% above inflation, and you're used to achieving that comfortably in an environment where inflation is relatively low and, you know, returns were quite high, in net inflation terms, going from that environment to an environment where, you know, structurally lower real returns is quite a difficult trade off to, to come to terms with.

So clear you need to have regular insights on what the best investment ideas are over that structural, strategic horizon. And that's why, my team in particular, produces quarterly capital market assumptions. We give that to Paul’s team. So that he and his team can really, reassess and revisit client portfolios on a more frequent basis, than perhaps those who are only doing it on once a year, for example.

Seun Fayoyin
Quite a lot of assumptions, that must keep you guys very busy indeed. Paul any thoughts to add?

Paul Sheffield
Yeah. So I think I'm going to come at this from more of a governance angle. And we think that having a strong governance process in place will provide the scheme or schemes with the ability to act quickly, if they need to, to evolving information. For example, new capital market assumptions or inflation adjusting quicker, and perhaps expecting more rates and so on and so forth.

And then when you think about that, I'm going to frame in to two broad buckets. So we have BAU, business as usual, and then what if we're wrong. So you can think of BAU or business as usual, as our base case. So in terms of that what we need to be able to do is adjust the portfolio for tactical opportunities, and to adapt strategic positioning in the event that new information does become available.

So this is where things change. And we know something today that we perhaps didn't know when we were setting the original asset allocation. So for example, imagine a scenario where inflation falls much more quickly than expected. Interest rates revert to pre-pandemic levels and our expected returns increase dramatically. We'd want to be in a position to adjust the portfolio in a way that capitalises on that type of environment.

And then in terms of the what if? So that's what if we're wrong, the oh dear moment. So we monitor portfolios, every day and we're continually asking ourselves, you know what if we're wrong, what if our base case isn't going to play through. What if this is a big shock and we do that through stress testing our portfolios to understand how they might react to a material market event. So such as a recession or an escalation of conflict in the Middle East. And what that allows us to do is to have a plan in place so we can act quickly, if we need to. So in summary, to help us, manage macro risk, in our view, we think we need to be nimble, we need to have a plan in place in the event that things don't turn out as we expect.

Seun Fayoyin
So we've spoken about steering portfolios and managing macro risk. The third investment theme that was discussed in the paper looks at the five mega forces which were mentioned earlier. So can you expand on these mega forces and touch on the opportunity set that they open up for clients? And Lara, I'm going to come over to you first. And then Paul, I'm happy for you to jump in too.

Lara Edmonstone-West
Perfect, thanks Seun. So let's start with a reminder about what these five mega forces were. So they were digital disruption and artificial intelligence, a fragmented world, the low carbon transition, demographic divergence and the future of finance. But what's important about them is what they mean. It's way for investors, so Paul as a CIO for the portfolio, can think about how he’s going to align his portfolios with the trends that are going to shape the future. When we look at these, we look at long term trends and also short term trends or themes because they're both really important. And actually to bring it to life, we're talking about which companies might lead the way as economies grow and markets evolve.

But actually, I guess what’s of most interest to me from a personal point of view is what my clients, prospects and those people I talk to see. So where is there appetite and interest. So it's definitely around the low carbon transition. It dominates headlines, we see it everywhere but also digital disruption and artificial intelligence. The reason for this I think is really obvious. It's fast moving, it's super exciting. And trustees often see it in their day-to-day working lives in terms of what it means for perhaps the companies that they work for. So I guess, Paul, do you want to talk about both of these in terms of what it means for the portfolio?

Paul Sheffield
Yeah, sure. There's a there's quite a lot to unpack there actually. I totally agree, the low carbon transition, it's hard not to have a conversation that involves that as a subject with our clients. But the way we incorporate that in our portfolios is twofold. So first of which is through the strategic asset allocation. So the capital market assumptions, which, Devan, comes up with, they take into account, how asset classes will behave in the future as we transition to that low carbon economy. So what does that mean for our portfolio? It's going to influence the asset allocation of our portfolios, because we want to allocate to those regions and assets that we think will do well out of that transition, to the low carbon world.

In addition to that, when we're implementing that, that strategic asset allocation, we want to select managers that we think are well positioned, to benefit from that theme as well. So in the private market space, for example, we allocate to a sustainable private markets vehicle. In terms of digital disruption and artificial intelligence, as Lara said, this is in my view, anyway, really cool, because what we've been able to do is introduce data innovation tools such as text scraping, which monitor and assess central bank policy statements, which has helped inform our success for short duration view. It also enables us to take into account other fast moving data points, such as job postings, so we can take all of this information into account, which feeds through into our tactical asset allocation views that we put in place, in our OCIO portfolios.

Seun Fayoyin
Thank you both. Finally, to wrap this up for this session, Lara, I'm going to come to you and ask you to really dig into your inner psychic abilities here and kind of look into your crystal ball. And as we look forward and think about the future, can you talk to what you think the future holds for the OCIO client segment?

Lara Edmonstone-West
Absolutely. Some of it, I think we're more certain about this than others. I think some of it is going to come over time and we'll see which areas move the quickest. I'm going to start again in my core world, which is DB pension schemes. We continue to see opportunities here in OCIO, partnering schemes at every stage of their life cycle. And I think what's really interesting at the moment is the conversation out there about surplus, and kind of what that means. So OCIO for DB schemes is absolutely there. No podcast is complete without talking about autumn 2020 and the gilts crisis. It has changed where schemes are in their end game and OCIO can continue to help navigate this journey. And you know what happens again, help them navigate it a little bit smoother.

I spoke at the beginning about regulatory squeeze, it haven't stopped. It's there for the right reasons, but that does mean that trustees can be quite overwhelmed. What they need to be able to do, is focus on the bigger picture and I know an OCIO enables them to do that.

But it isn't just pension schemes that are leveraging our broader OCIO capabilities. As I mentioned earlier, we’re seeing interest everywhere. So insurers, family offices, foundations and endowments. So we're talking across the institutional spectrum. And I'll touch on each of these briefly, so insurers. What's the nuance here of insurers, what they're doing is they're reevaluating what they want to see from an operating model perspective in an OCIO arrangement. So I’ll look back to April 2023, when LV= selected BlackRock as their primary asset manager. Why did they do that? Because they wanted their members, customers and all of their financial advisors to have that access to that deep investment expertise. And that's what BlackRock's been able to do for them. And ultimately, why does that matter? Because it means they can give those long term investment solutions across their member and customer base. And that's been a huge enhancement to the LV= offering.

In terms of the nuance of a family office. It's really different. So what drives demand here? It’s about potential investment returns that they would get. It's about having institutional risk management, perhaps they haven't really got it at the moment. Cost considerations and succession planning. So actually my world, in the DB world, succession planning has been a big theme. It's no different in family offices, perhaps they've got a CIO on the family organisation side, and they really need to think about what happens there.

Another driver and something that’s super interesting is generational wealth transfer. And what does that mean? And how does that change how you invest for the family office? And an OCIO can come in here and help them navigate that change.

And then I'll finish up with foundations and endowments. So Devan and Paul have spoken about the market volatility and some of the the challenges that that can bring, and that need to be nimble. But in foundations and endowments there's also increased scrutiny. So here I'm talking about the charity commissioners. And actually what it means is being nimble is really key. And outsourcing can assist trustees with some of the new guidance that they now have to meet, so that regulatory burden that I spoke about earlier. Probably not too dissimilar to many people listening, they probably only meet on a quarterly basis. So what does that mean? It means that decision making can be delayed. And given current market environment, that can actually be unfavourable for portfolios. Maybe you fail to protect on the downside, or maybe you fail to capture on the upside. So the OCIO is no different, the theme is consistent. It's that daily management, giving you that investment and risk quality approach to the portfolio.

Seun Fayoyin
Excellent. thanks a lot for that Lara. And that's all we have time for today. I think we've covered a lot. We've talked about the five mega forces shaping the new investment regime, the increasing role of outsourcing, and the role that OCIO you can play in navigating in this market environment. And the fact that there are several client segments where OCIO plays a pivotal role in.

Thank you again, Lara, Devan and Paul for your time today. And to our listeners, join us again soon, where we will be discussing some of the key trends shaping the UK retirement market.

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PensionShip: Episode 1

Illiquids: Nothing Will Pay Off More Than Educating Yourself

BlackRock Speakers: Seun Fayoyin (moderator) and Simona Paravani Mellinghoff

External Speaker: Brendan Walshe from The Pensions Regulator

Seun: Welcome to the brand new season of our podcast series. This year we renamed our podcast to Pension Chip, PensionShip is a podcast series form BlackRock for professional investors, where we share expert insights and opinions on some of the key trends that are shaping the UK retirement market. I’m Sean Ryan and I’m delighted to be your host for this season.

Over the course of the year, we’ll be joined by some fantastic guest speakers who will be on hand to share their insights and thoughts on various topics, including fixed income or CIO, hopefully solutions, ETFs and a host of other great topics. So please do subscribe to the series so that you can receive every edition of the podcast straight to your platform.

Onto Today, we’ll be kicking off with a focus on private markets. There is no escaping the fact that private markets is increasingly topical and has become really a key area of consideration for investors looking to make portfolio allocation decisions. Joining me to discuss this are Simona Paravani Mellinghoff, who is the global CIO of Solutions for the BlackRock Multi Asset Strategies and Solutions Team.

Seun: Simona, hello and welcome to you. It is great to have you on the podcast today. Do you mind telling us a little bit about yourself?

Simona: Thank you so much for the invite. My colleagues and I have the privilege of partnering with pension funds, sovereign wealth fund and wealth managers to provide customized multi asset solution as well as fiduciary, sometimes known also as OCI or services.

Simona: In addition to my role at BlackRock. I’m an academic at Cambridge University where I teach a course in artificial intelligence applied to finance a topic that is very much top of mind for investors in private and public markets. That is fantastic.

Seun: Sounds like you have got a very busy schedule. Also joining us is Brendan Walshe. Brendan is a principal and investment consultant at The Pensions Regulator.

Brendan, welcome to you and thanks for joining the podcast. Are you ready to share some fantastic insights?

Brendan: Thank you, Sean. Hopefully I will do. I’m Brendan Walsh. I’m an investment actuary at the Regulator and I’ve been there for nine years now. My role involves everything to do with investment trusts. DB DC Master Trusts, super funds, anything with an investment tag to it.

Brendan: I’ve also worked a lot in my past life with infrastructure investment and other private markets and I specialize quite a lot in in climate, ESG and water sustainability issues.

Seun: Thanks, Brendan. Great to have you on. So let’s jump straight in. We know that the investment markets have been dogged by significant volatility and uncertainty as a result of several factors, including the current interest rate market environment, inflation, geopolitics, to name a few.

Seun: However, we can’t escape the buzz surrounding private markets. Can we actually start off by discussing the current market environment and why private markets could play a pivotal role in delivering better outcomes to investors? Simona, I’m going to come to you first.

Simona: Well, big picture, the quote that comes to my mind is inspired by George Orwell. We can say that the future is by definition uncertain, but some parts of the future are a lot more uncertain than others.

Simona: And right now it feels very much that way as we have uncertainty on multiple fronts, starting with the macro picture. Will inflation moderate? And if so, to what extent, given some of the pressures from mega forces such as an aging population, we have of course uncertainty on the geopolitical front and we have uncertainty linked to structural changes related to mega faucets like artificial intelligence.

Simona: Against this backdrop of great uncertainty, the role of private markets that we define is a rather integral genius group of assets ranging from VC to real estate is even more relevant and it is even more relevant for three key reasons potential for diversification, potential for return announcement and potential for inflation mitigation.

Seun: That is great, Simona, thanks for setting the context in terms of the current macro backdrop and for also emphasizing the key fact that the private market landscape is not a homogeneous one.

In fact, it is one that consists of several different underlying asset classes to consider. And I love the three piece that you mentioned. Do you want to elaborate on that a little bit?

Simona: Let me start with potential for diversification. Investing in private markets is a way of accessing less correlated or in some cases even uncorrelated sources of return, where some of the drivers of return are really down to fairly idiosyncratic factors.

Simona: A good example of this is music royalties. The sheer breadth of the underlying investment universe also speaks to the diversification potential and let the numbers do the talking. Here in the U.S. market, for example, there are about 5000 listed companies, but there are also 36,000 VC companies. VC backed companies and about 16,000 PE or growth backed companies. So diversification in numbers, moving to the potential for inflation mitigation.

First of all, why is it relevant? It matters because while we believe inflation will moderate, we still expect that on average inflation on a medium to long term horizon is likely to be closer to the 3 percent rather than the 2 percent mark. For a country like the U.S., we’d expected inflation be more elevated on average than in the past.

Asset classes like infrastructure or real estate do tend to have an explicit inflation linkage in their revenues. Stream may help mitigate the inflation impact on portfolio returns. And finally, potential for return announcement. When we look at our capital markets assumption of risk in return for a broad set of assets, all of these are available on our website and updated quarterly expected returns for assets such as direct lending or opportunistic credit, not to mention P are still expected to outperform public equity on a medium to long term horizon.

Seun: So investing in private market is important because of the potential for diversification, potential for inflation, mitigation and potential for return announcement. And Brendan, is there any other thoughts that you would like to add?

Brendan: Yeah, I mean, I’d agree with a lot of the investment characteristics which someone have mentioned. I think the other thing that’s really important to bear in mind here is some of the industry dynamics, and I know some have mentioned some in each population, but if we look in the UK, the pension landscape is changing dramatically.

Brendan: So in DB, you know, we’ve had very recently significant improvement in funding levels for a large number of schemes and we’ve had an increase in the level of transfers to insurers. 50 billion was transferred to the insurance market last year and they expect a similar level this year. But you’re also then seeing some other new initiatives not following the Autumn Statement last year, the potential for schemes to run on the scheme longer and how much of a surplus from that scheme and super funds, which is the first super Fund transaction, was announced in in November last year and we’ve also seen very today the launch of the details of the public consolidator.

Brendan: So there’s a lot of change in DB and that affects the types of private market investments that different schemes might want to consider for investing. We’re also seeing in DC where the market is still to a degree in its infancy, but only a 10th of the size of the DB market. But it is rapidly changing and we’re seeing schemes of building scale, We’re seeing developments in investing to and through retirement, which all feeds into changing the needs you might have for private market investments and the investment horizon change and the characteristics you’re looking for.

So we think we’re moving to another phase of development. We’re going to have fewer, bigger and better run schemes. And alongside that we’re also having more focus on better trustees more generally.

Seun: Brendan You touched on the Autumn Statement just now leaning a little bit more into this. There’s clear political and regulatory momentum in the UK to encourage pension schemes to consider investing in illiquid assets and really commit more money to the private market space.

Can you touch on some of the factors that are driving this growth momentum and what are the key benefits and opportunities for pension schemes and their members as a result?

Brendan: Yes, certainly. I mean, I think firstly as a regulator, it’s very important to say that we don’t direct investment. We are an arm’s length body. We operate in line with the regulations, but we don’t tell trustees where to invest.

We expect them to take appropriate advice and to make decisions that are in the best interests of their members. However, you know, it’s no secret that in industry there has been a lot of mood music. Our government has been very much around investing UK policy, investing in product finance, investing in high growth equity and some of that music has been clearly driven by the fact that overseas pension funds, Canada and Australia in particular, have been investing quite heavily in UK ports and so that’s to say, well, why aren’t UK pension schemes investing?

Brendan: Who keep you on, see, and if that there are some structural reasons for some of that given the regulatory environment, given the, you know, the button, the boundary conditions that schemes in the UK have to operate and they’re managing the risks against the appropriate regulatory structure. But, you know, I think private markets, as some have mentioned, isn’t one single thing.

It is a very broad universe of opportunities and risks. And within US asset classes. So basic class and individual investments, the way you access them also influences the risk profile. So I think, you know, you sort of think of it in terms of there is an opportunity probably on the back of the government momentum, but it’s no harm for trustees to be asking their advisors and service providers, can we do these investments in the UK?

Brendan: Are there opportunities in the UK and forcing those decisions to be had? But I think it’s just it’s more around. There is interest in the space, there’s a spotlight being shown on the space and I think the momentum seems to be that, you know, trustees will be asked to, to explain in future disclose and explain requirements if they’re not investing in some of these asset classes.

So I think it’s just it’s just the current momentum in markets. But at the end of the day, trustees, a fiduciary is they need to take advice and make decisions in the best interests of their members.

Seun: Very insightful, symbolize there anything else that you’d like to add to this?

Simona: I think the momentum largely reflect what I described earlier potential for diversification, potential for inflation, mitigation and potential for return announcement.

Simona: There is also very interesting international evidence on the beneficial impact of investing in private markets for pension fund. So as an example, BlackRock did publish a study entitled The Peer Risk Study Australian Superannuation Market, and based on data available as of September 2023, we showed that for large size Australian funds, the experience of those that had invested 20 to 25 percent of their assets in private markets was a positive one in the sense that they tended to outperform their peers.¹

Seun: Thank you. Similar really interesting results from the survey that you’ve actually mentioned. It looks to us that there’s a lot that we can learn from some of our peers in other regions like Australia. Now Brendan, coming back to you and giving your regulatory hat on, In January, the Pensions Regulator released some guidance on private markets, which speaks to the need for schemes to take appropriate advice and governance when allocating to private markets.

Seun: Can you touch on this and do you see this leading to a bigger role for fiduciary management? Because this is actually something that we often get asked?

Brendan: You know, certainly I mean, I think first you should say that we don’t produce guidance, just say producing guidance. We produce guidance to hopefully meet a need, an industry. And over the period September two to December last year, we engaged with industries and informed or guidance by discussions with industry and or guidance is also informed by what we’ve done with the Finance Working Group, which had been in industry from 2021, 2022 and produced the first report which dealt with some of the barriers to two DC schemes investing.

In illiquid and private markets and the second report in November 2020 to produce a suite of guidelines to help overcome some of those barriers. So it what we did, it’s not a manual for investment, but hopefully what we would like it to do is ensure trustees are better informed and can have more informed discussions with their advisors and service providers and hopefully lead to better outcomes.

Brendan: Risky members in terms of fiduciary management, I mean, as someone who was before I was the regulator was an investment consultant, an industry for many years across the usual suspects. I would certainly see the potential for fiduciary management and know the service providers having a big role here. You know, one of the things we have seen and we produced a series of blogs in line with the Finance Working Group as well, was one of the challenges has been the level of innovation and DC has been very limited compared to DB.

DC has very much been a poor relation. Now that’s been the story to date, but DC is now starting to get scale and momentum and we know we’ve seen in the markets last year I think NEST hit 30 billion for the first time and in their annual report and accounts they have contributions around 6 billion a year.² So you can see why some of these schemes are going to get significant scale quite quickly.

Brendan: And it’s not implausible that for the end of this decade, necessarily bigger than in a large scheme we have in the UK, which is UCC currently. So a lot of money going into these, a lot of opportunity and I think innovation will happen in that. One of the challenge with private markets is it is a very broad universe.

Brendan: Timing investment is very important. The governance modes are quite high things. So if they go well, the governance demands are high. If they go wrong as can happen to times, the governance matters. Rocket So I think you just need to be aware that these things do need a little bit of care and maintenance, do need a little more engagement from trustees.

Brendan: And, and I think that’s plays into the fiduciary management sector because if you’re scheme governance doesn’t enable you to do that, then outsourcing it to fiduciary management manager or another service provider is an obvious route to that. And finally, just make the analogy with TB. When I was in the industry many years ago, fiduciary management was, if you like, being imported from the continent and people trying to get traction in the UK, some of the early adopters were sold on the basis of use fiduciary management to do your alternative portfolio.

Brendan: And that sort of built the case and then people expanded from that. And I think in similarly in DC and private markets, there is that opportunity that you do need providers, we’ve got the resources to scale and can build multi year portfolios across strategies and opportunities.

Seun: Perfect. Taking a slightly different tact and thinking about sustainability or looking through the sustainability lens, as it were, this is obviously very topical.

In fact, I don’t think I’ve been in any conversations with any clients over the past 24 months where sustainability was either not reference or it wasn’t a key area of the conversations. We know that ESG considerations continue to be critical for investors when it comes to reviewing their investments. So how does this impact the potential allocations to private markets? Simona, I’m happy for you to jump in here.

Simona: The unique access and control features of private markets can be a meaningful help in achieving a particular sustainability goal, starting with access. The ability to invest, for example, in infrastructure is a one way of potentially participating directly in the climate transition. Similarly, when we talk about control or the control that an investor can achieve by investing in a particular company through private equity is higher than through public equities in some cases, private equity investment may also result on a seat on the board, which then could translate into having a more direct impact on the desired sustainability outcome.

Simona: And this is not limited to the private equity world. Private credit is another good example. As an investor in private credit, the lender actually has the ability to negotiate the terms.

Seun: Any thoughts from you, Brendan?

Brendan: Yeah, I’d start with the investment opportunities and I think, you know, I mentioned earlier the IEA report from last year, which said by 2030 we need 4 trillion of US dollars invested in climate mitigation strategies.³

That’s up from around 400 billion currently. So there’s a huge increase over the next few years required. And on top of that, I have said that 80 percent of that money is going to come from private capital. So I think that gives you an idea of the amount of money which is there and the opportunities within that in a broad spectrum within private markets.⁴

Brendan: And the second point to make another piece is that there are some stakeholders who don’t really trust the same level of climate urgency, who don’t see the need for the same level of energy as some of us who work quite a lot in this space do. But I think if you look at where we are today, 1.1 degree, we’re targeting 1.5 around.

Brendan: And based on the latest cop, we’re probably heading to 2.7, 2.8. So we’re a long way off where we need to be. And at one point, one above pre industrial levels, we are already seeing climate impacts coming through across the globe, whether it’s in wildfires and droughts and flooding in additional insured losses from typhoons and other storm damage. So we’re seeing huge impacts already starting to come through and that’s a 1.1.

Brendan: It’s not going to be linear as we go forward is going to be worse than that. And so we do need to adapt and we do need to build resilience and we need to get ready for the future. You know, it’s no longer business as usual. And I think we should also help to bring this home to a across to the investor base as is, you know.

Brendan: TFT Whether you like it or not, and whether you think it’s a huge burden, what it is doing is, is ensuring more transparency and organizations are having to walk through disclosures have having to think about some of these issues. And it basically it has helped to get climate and TFT Also what is nature and biodiversity on the agenda?

Brendan: So as those sort of cascade through and you get transition plans on top of that, you know, the fact that we can’t remain in business as usual, a sense of urgency will start to creep through and I think the need for more investment will start to be patently clear, and that will be from organizations wanting to transition organization is wanting to build, to adapt to the new environment and to build resilience in the supply chains and value chain. That’s why.

Seun: Thank you. So at the start we discussed some of the opportunities and benefits of making an allocation to private markets. Can we pivot a little bit by touching on some of the challenges that investors will face, as well as some of the current barriers to wider adoption? Back to you Simona.

Simona: Indeed, there is no free lunch.

And so with the incredible opportunity also comes some challenges to are at the forefront for many pension funds, liquidity and selection on liquidity. We think it is important that liquidity risk is assessed holistically in a total portfolio context. When one looks at private and public investment rather than just focusing on the liquidity of the former. Similarly, concerns around selection stems from the very significant dispersion in managers performance within the private markets sphere.

Simona: The dispersion is in fact orders of magnitude larger than in public markets. It is therefore paramount to have the resources, talent and data to analyse in due diligence. The managers one invest in and.

Brendan: Yeah, I mean I think there’s always a challenge in private markets when you’re moving from portfolio theory. Will this asset give me a return of this risk of that?

And of course structure and correlation factor that to portfolio implementation. It is a challenge in private markets because, you know, the assets are not always available at the right price, at the right risk point in the amount you need when you need them. And that’s just one of the challenges and that’s why you need to sort of go into private markets with a view to building a portfolio and using the portfolio to do different things for you within your scheme context.

So yes, there have been I mean, in DC, there have been some operational challenges over the last few years. Liquidity is obviously an issue for SCB and DC. I think liquidity, you know, sometimes liquidity just gets used as a big badge, but in fact it very much depends on where your scheme is, where it is on this journey, whether it’s, you know, if you’re transferring to an insurer, liquid is probably more much more of a concern than if you’re an open scheme with a long investment horizon and still accruing benefits.

New members coming in. So I think liquidity is going to be sort of seen through the right lens and through the right sleeve for individual schemes, for schemes, scale of scheme is a big issue. 72 percent of DB schemes in the UK have less than 100 million.⁵ So that does sort of then limit some of the things they might do, but that just might mean they might want to outsource some of that too.

Brendan: To others. We’ve got the governance structures and that can help them implement the strategies they want, you know, challenges, access to and route to market isn’t always evident in private markets, but following recent developments following the DC industry having sort of gone through a sort of period of rapid growth, we’re not seeing more products developing. We’re seeing more innovation being brought to market.

We’ve I think we’ve seen for tests already. Well, I think the other challenge we haven’t really touched on and it’s you’ve just got to accept it’s there and it’ll always be a challenge, I expect. But, you know, it’s something we need to work on is, is valuations and how that links to pricing in DC. If you’ve got members moving in and out, having some comfort and having a robust pricing point is quite important.

Brendan: And you know, valuations have always been problematic. In private markets. You really value evanescent when you sell it, but if somebody asks, you hold it for a long period of time. So you do get into this from ground up valuations versus room for valuations of what is the right value at the point in time and then market sentiment. So it’s challenging. But just because it’s a challenge doesn’t mean you shouldn’t do it.

Seun: Yeah, very interesting indeed. Thinking about some of the points that have been made during the course of a conversation, I’ve noted that an overriding characteristic of private markets is that they’re in fact in liquid. And this has been touched on by both of you just now.

Seun: And as a result, there could be some time to ramp up the portfolios and also potentially some time to exit. This also seems to tie in with some of the barriers to wider adoption. And so. Simona coming back to you, how do you ensure that we build sufficient dynamism as possible with a multi alternative portfolio approach in order to be able to navigate through market environments, particularly in the ramp up stage?

Simona: I would say that the key to dynamism is a holistic approach, holistic approach to the opportunities, the risks and the implementation options. On the opportunities side, through our capital market assumptions, we look at returns across public and private markets using a consistent framework that enables us to compare opportunities across the entire spectrum and deploy capital accordingly. Similarly, on the risk side, it is important to view risks not just through an asset class lens, but with a risk factor lens, something we do via our Aladdin platform.

Simona: Let me illustrate the importance of this point with an example. Let’s assume that in a portfolio we have an investment in commercial real estate in Texas as well as a gas pipeline in, let’s say, Europe. The reality is that if one looks at risk just at an asset class level, one may actually miss the correlation between those two investment that comes from their more or less direct exposure to commodity prices.

Finally, one should take a holistic approach to the implementation choices. So, for example, one should leverage options like secondaries or co investment to limit the j curve. And furthermore, one can use the risk factor lens to proxy private market exposure through public markets in the ramp up phase for private markets.⁶

Seun: Thanks for that, Simona. And so, my final question goes to the both of you, and it will be on the future of the private markets landscape as we consider the evolving nature of private markets.

Seun: If you had to highlight one image, an aspect that you find particularly interesting or impactful as we look into the future, what would that be? Brendan, I’m going to ask you to jump in first.

Brendan: Yeah, well, if I may, I’m a throw to into the mix because I think the industry dynamics are key, certainly in the pensions landscape, moving towards fewer, bigger and better run pension schemes.

And I think that that changes the nature of where investors might want to invest and their ability to invest also. So I think that this got a key industry dynamic in DC is the future. But more generally I think the to my mind and probably because I do a lot of work in climate in ESG and sustainability space, is it there is going to be a huge amount of investment flowing into investment flowing into climate over the next 5 to 10, 20 years.

Brendan: And I think that is really where the opportunity set will be. There will be huge need for private capital to support that. And we are also in an environment where the market is rapidly evolving in climate, ESG, 1015, nature and biodiversity and those dynamics and that into the mix in that area and technology which will also affect all investment, I think you know, it’s never been more true than the past investment.

Brendan: Past is no guarantee to the future. I think we’re in a very live and moving environment which will change very dynamically over the next 3 to 5, ten years and not just be to the macroeconomic macroeconomy effects we’re seeing of geopolitical risks. It’ll also be the sort of more fundamentals around climate and A.I. and the digital revolution hitting home and.

Seun: Simona I noted that Brendan actually made two suggestions. I’m happy for you to jump in here. If you have two or if you have one.

Simona: I would pick the democratization of access to private markets. This is a truly global phenomenon. We are seeing more and more interest on how we can incorporate private markets in these schemes as well as in wealth solution in multiple markets UK, U.S., Australia and France.

Simona: Just to mention a few. And I believe this is truly exciting because as I hope that our podcast has shown today, there is a lot to be excited about in terms of private markets. Of course, they come with their own challenges, but the opportunity is quite significant and particularly relevant in the current market environment. So the ability to ensure that more savers and more pensioners will have access to the opportunities in private markets represent something truly exciting.

Seun: Fantastic, right. So all the points that you’ve both made certainly do resonate. It is fair to say that while there are some challenges to consider when thinking of private markets, there are also clearly some fantastic benefits to investors in making allocation to this space. Well, that is it for this episode. I believe that we’ve been able to cover quite a lot of ground in such a short period of time.

Seun: Thank you. Simona and Brendan for your fantastic insights and engage in discussion. Join us again soon. We will continue to discuss some of the key trends shaping the UK retirement market.

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¹BlackRock, Peer Risk Study: Australian Superannuation Market, September 2023.

²Professional Pensions, Nest hits 30bn pounds of assets as it continues expansion into private markets, 26 May 2023.

³IEA, Net Zero by 2050 Report, https://www.iea.org/reports/net zero by 2050, May 2021.

⁴Ibid.,

⁵Pension Protection Fund, PPF Purple Book for 2023, 31 March 2023.

⁶PitchBook, as of September 2023. IRR is a discount rate that makes the net present value (NPV) of all cash flows equal to zero in a discounted cash flow analysis. Underlying performance is representative of a broad set of funds.