Check our homework: is the mallowstreet research agenda still relevant?
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We set our research priorities in December 2022. Our 2023 research agenda includes research topics spanning DC pensions, cashflow investing, real assets, private markets, natural capital, social impact, insurance, equality, diversity and inclusion (EDI), and trusteeship. Halfway through the year, it rings more relevant than ever. What are the questions we seek to answer, and why do they matter?
As DB schemes increase focus on their endgames with funding level improvements, many providers are re-orienting their offerings towards DC schemes. However, DC schemes have faced rising regulatory pressures in the UK. So, in February, we asked: are asset managers DC ready? The July Mansion House reforms are only a continuation of the key trends we have been following for months, including new value for money metrics, the role of collective defined contribution schemes, small pots consolidation, charge cap and performance fees review, and the value-add of illiquid assets.
No matter when the new DB funding code comes into effect, the incoming rule changes will accelerate de-risking and bring significant maturity dates much closer. Given the stronger connection between funding levels, covenant risk and investment strategy, we asked in February, what does the new DB funding code mean for asset managers? It sounds logical that cashflow-driven investing (CDI) will be the way to go, but the value-add of CDI strategies requires more research. And after reviewing LDI an CDI side by side in June, we have more questions than answers.
DB Consolidation and Risk Transfer
Our Pension Risk Transfer Report, in partnership with Rothesay, is in its fourth year now, and the most recent unpublished analysis shows that 45% of schemes have accelerated their endgame plans in the last 12 months, with 62% of those targeting buy-out now expecting to transact within the next five years. But why are buy-outs gaining popularity? Hint: a growing regulatory burden and unclear view of covenant risk are just the start of the problem. Against this backdrop, the future role of consolidators and alternative endgames remains unclear.
Private markets are appealing in volatile environments, but their illiquidity makes the industry question their role in the traditional DB endgame journey and DC portfolios alike. In May, we wrote that there are doubts whether private markets are worth it – so what are managers missing? The Mansion House Compact announced in July is a decisive continuation of efforts to improve access to private markets for DC schemes. However, by asking whether DC schemes should allocate more to growth assets just weeks earlier, we identified a need to investigate the different attitudes of DC trustees, as well as their peers in other types of schemes.
Rising interest rates are affecting the premium real assets can command, as well as how they are financed. But while infrastructure and green investments make the climate transition possible, not all real assets are met with the same enthusiasm – or have the required ESG credentials. With the introduction of long-term asset funds, the push for more growth assets and doubts over where the financing for the green transition will come from, we asked in April: who will invest in real assets? In other words, if real assets have a role to play in DB de-risking, DC decumulation and retirement products, as well as insurance portfolios, are managers’ offerings fit for purpose?
The UK government has set 2030 targets to halt the decline of nature and leverage private sector finance to enhance our natural environment – and UK pension funds must be among the capital providers. With TCFD adoption broadening their horizons, the variety of options available to UK institutional investors is expanding rapidly. Looking beyond climate-positive investing, the Task Force for Nature-related Financial Disclosures has now released not only its risk management guidance, but also its approach to metrics, targets and scenario analysis. We are currently reviewing how these developments will affect UK schemes, insurers and asset managers.
The Department for Work and Pensions has formed a taskforce to identify key metrics for social factors and provide industry guidance. Despite changes in the current regulatory focus, there are several regulatory initiatives that are increasing the focus on ‘S’ in ESG considerations – and both schemes and managers should take notice. The rapid progress on TCFD reporting shows that trustees are increasingly equipped to keep pace with more robust social metrics reporting. However, schemes will be hard pressed to pursue social targets without sufficient support from providers – so are managers prepared for greater scrutiny of their social credentials?
The higher market volatility seen in 2022 across a range of listed assets, along with changes to reporting standards and credit loss models, may push insurers to hold more capital – which profoundly impacts their investment decisions. In parallel, the UK government has laid out changes to Solvency II requirements, which should broaden the investment toolkit. Despite all this, the mallowstreet Insurance Report shows that insurers’ conservative investments threaten returns, while asset risk concerns are preventing further allocation into illiquid assets. The report is available for purchase here.
Equality, Diversity & Inclusion (EDI)
Last year, the EDI Survey uncovered that while most schemes are in the early days of their journey, it will be a growing factor in selecting providers. Since then, the Pensions Regulator (TPR) published its long-awaited EDI guidance for trustees. It also recently launched a survey to explore the proportion of trustees with protected characteristics, as well as discover trustees’ views on EDI. The Department for Workforce and Pensions (DWP) is also working to improve EDI. This is why we are proud to announce the return of our annual EDI Survey, in partnership with Cardano.
July 2023 also saw the Department for Work and Pensions (DWP) launch a consultation as trusteeship comes under renewed scrutiny. But already in April, we launched our third annual Trustee Report, in partnership with Janus Henderson Investors – which highlights once again the growing regulatory pressures on trustees, despite the professionalisation of trusteeship and the increased levels of accreditation. Given the popularity of the TPR trustee toolkit certificate, but not the lay trustee accreditation provided by the Pensions Management Institute (PMI), we expect trustee training to undergo significant change in the coming months.
Why do research?
So, should asset managers do market research? Yes, for three reasons: research can unveil the true challenges of UK schemes and insurers. This helps managers create credible content, which has longevity and improves brand reputation. And engaging content can drive engagement and leads, day after day. Many of the topics we want to dive into still need a research sponsor. Contact us if you would like to partner with us, get ahead of industry developments and establish yourself as a key partner to the UK institutional investor community.