The UK workplace pension industry could have the opportunity to save "hundreds of millions of pounds" for savers when it comes to investing in private markets, a report from The People’s Pension has suggested.

The paper found that while there are nearly £1bn in potential fee savings available, no master trust currently has the scale to fully take advantage, which aligns with the government's own recent calculations, which suggested that investing in private markets delivers little additional value at current fee levels.

The report also found that investing 10 per cent of all projected master trust assets in private markets via external asset managers by 2030 could cost these schemes, and ultimately savers, up to £1.5bn.

According to the report, applying external management costs to the 2030 asset base yields annual fees ranging from £560m to £15bn depending on the precise form of outsourcing.

However, the report showed that there are ways to reduce these costs, by bringing fund selection and management in house, and using successful co-investment programmes, which it said could reduce total costs by more than 60 per cent, or nearly £1bn.

"The decision as to whether to manage internally or externally is not all-or-nothing," the report stated.

"There is a spectrum of models that outsource different elements of private market asset management on both a single-pension fund and pooled solution basis, and the best model
depends meaningfully on the scale that can be mustered.

"Understanding these models, and the path that large funds have taken to internalise their private market management, provides a guide as to how internal management capabilities could evolve."

The report clarified though, that these calculations are based on aggregate master trust assets, noting that while the largest trusts are growing rapidly, no individual trust currently has the economies of scale to deliver the largely internalised approach to investing in private markets that the report outlines.

But the report suggested that there are other options that master trusts could potentially explore, which would enable them to invest in private markets, whilst the industry continues to focus on consolidation in the meantime.

The report, written by market analyst and leading investments expert Toby Nangle, coincided with the first stage of the government’s Pension Review, which included proposals to consolidate the workplace pension market in order to encourage further investment in private markets.

“Private markets offer opportunities to pension investors, but also challenges. And international experience shows that scale is the key to boosting member outcomes," Nangle stated.

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

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

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

“As this report states, the best value approach to investing in private markets is for larger funds to develop appropriate skills and scale to access private markets investments in optimal ways – this might be through direct ownership, co-investment and not just through funds.

"The People’s Pension has recently outlined its intention to start investing in private markets and we are currently in the process of hiring the investment team members who will make this possible.”

---