XPS Pensions Group plc (406.F) Earnings Call Transcript & Summary

Good afternoon and welcome to today's webinar where we're going to roll our sleeves up and get to the bottom of what needs to happen of the DC schemes to make the most out of investing in illiquid productive assets, along with some other key DC matters in these know abouts. I'm Simeon Willis, Chief Investment Officer here at XPS and I'll be your chair for today. I'm joined by a panel of experts who are going to help us get to grips with what's really going on. So please join me in welcoming our expert panel. We've got Independent Trustee, Dianne Day from Independent Governance Group, private market specialist Melville Rodrigues and investment platform expert, Mithesh Varsani from Mobius Life. We've also got our usual panel of XPS experts with DC specialist Felix Currell; Head of DC Investment, Mark Searle; and Head of DC, Sophia Singleton. Now the UK defined contribution pensions market represents assets around GBP 600 billion, which compares the corporate DB market with assets around GBP 1.4 trillion. So DC represents about 30% of corporate pensions assets. Whilst the average DB scheme advice by XPS invests around 7% in private market assets, the average DC scheme in the UK invests less than 1%. This compares with the DC market in Australia, where larger superannuation funds typically invest 30% in private markets. Now by the 1st of October this year, trustees will need to publish their policy investing in liquids in their statement of investment principles and most DC schemes already have to disclosed their asset allocation as part of the disclosed and explained regulations. And it's widely recognized that UK DC schemes are missing out. So in July 2023, Jeremy Hunt announced a package of reforms aimed at getting DC pension schemes more invested in illiquid private market assets, with a particular focus on UK assets to stimulate UK economic growth. 9 prominent DC investors pledged to allocate 5% to private market assets and this group has since grown to 11. This package of measures was estimated to boost an average member's retirement income by GBP 1,000 a year. Now this has caused great excitement within the pensions industry with everyone scratching their heads, working out how this can be achieved and what hurdles need to be overcome. So today, we're going to unpick some of this for you and set out what we think needs to change to make it all happen. But before I go into the first presentation, I'd like to gauge your appetite for investing in illiquid assets with a polling question. So the question is, how convinced are you that investing in private market assets will ultimately benefit savers? Very convinced, convinced, not very convinced, not at all convinced or you don't know. Now don't forget to scroll down and press submit after you've selected your answer. And whilst you're thinking about that, I should also mention that the layout of your screen is dynamic, so you can move around the various items and resize as you wish. You can also access the different backing materials through the resources icon. You can also ask questions at any point during the session using the Q&A tool and we'll be fielding these questions to the panel as we go through. And we've also got some time planned in the middle and at the end of the session to cover as many questions as we can. Now I'm going to bring the results up and let's take a look at what your views are. Okay. So that's interesting. So we've actually got a weight of people who aren't actually convinced that this is a good thing ultimately for savers. So well, that's an interesting context to set us up for today's discussion and a nice intro, I think, for future session, which is talking about the size of the prize investing in private market assets. So Felix, over to you.

Thank you, Simeon. So first up, we've got to have a look at what are private market assets. So private market assets take a range of different forms, each with one key similarity investing outside of the standard tradable markets. So this can be credit-based such as private debt and loans or can be equity-focused, investing capital into companies looking for equity outside of normal stock exchanges. Now a word of warning, you'll hear lots of different words to describe these assets today. So illiquids is the broadest sense of the term, referring to the key characteristic of the assets that we're exploring today. Private markets is a term I will be using to describe the type of illiquid asset that we are talking about, investing in and productive assets, which is a subset of private market assets focused around growth. As ever, we can thank our industry for the never-ending jargon, but for simplicity, what we'll try and do today is use these interchangeably. Now why are we talking about private market assets? So the reason we are looking at them is that they can provide enhanced returns as not all investors can invest into them. Just because an asset is illiquid, it doesn't make it any more attractive than any other asset. However, when you're an investor that you have scope to invest in something that other investors don't, that can give you an advantage. Typically, the scope for enhanced returns is referred to as an illiquidity premium. Now there's no such thing as one illiquidity premium. But to give us an idea of the sort of magnitude of enhanced returns, what we have is historic data and estimates. So we've included a graph here of returns to 2022 on an example selection of private equities, example selection of their return above public equity returns. And the return from each year of private equity funding along the bottom shows meaningful growth outperformance, and this is echoed across various studies. What's more, even though charges tend to -- well, are higher in private equity, the outperformance has historically been positive net of fees. Now this return tends to vary significantly depending on the type of private market and product used. This is a wide and diversified field. As a guide, however, we would expect private markets to offer a net additional return of around 1.5% of what we would expect from publicly traded equities after all costs are taken into account. Now this estimate looks fairly consistent with the analysis that DWP have used when discussing the July '23 proposals. Now one thing to note is that the private markets suffer from the shortcoming that there aren't publicly available prices. So it's critical that you don't overpay. It makes it such a specialist market. Studies have shown that manager performance varies wildly. So it's important that due diligence on manager selection is done, so you avoid overexposure to an underperformer. Now crucially, why we're here is how does it affect member outcomes. So in the Mansion House Reforms, there was a clear reference to benefiting members by GBP 1,000 per year. Now that essentially arises from pot sizes going up by around 12% over member lifetimes. However, it's important to note that only 3% of that 12% came from additional private market allocation. Based on DWP's own figures, the remaining 9% is from other proposals such as getting members to invest earlier and invest more and from reducing fees through consolidation. Now what is our view of private market assets? Well, we think that any benefit to member outcomes should definitely be explored, particularly if it comes to a manageable risk or the risk that it bring are acceptable. Now in this case, for pension schemes, illiquidity can be a very acceptable risk. If anything, the pension scheme is more of an inconvenience of a lack of availability to funds than a risk, and you can turn that potentially into enhanced returns. Now we have a stronger view than DWP and that we think there is scope to invest more than 5%, more like 20%, a bit more similar to the other countries that Simeon was mentioning earlier. Now this gives a much more material impact on member outcomes of the order of 12% arising from these investment changes alone plus any gains from other measures on top of that. Of course, it's not as simple as all that. But the discussion today will go into the complexities and some of the downsides. But overall, we are very supportive of schemes looking to explore illiquid assets further and the benefit that, that can have on member outcomes.

Thanks, Felix. Yes. So the thrust of Felix's presentation there is, there's an opportunity to benefit from locking your assets up. And that could be a good thing if it's only of modest inconvenience to the members. Now actually, picking up from our polling question, I think it would be good to hear Dianne's perspective as a trustee in terms of the extent that Dianne thinks that there's benefit from investing in illiquid private market assets.

Thanks. I think there are strong arguments for what is a massive range of unlisted assets that the trustee could invest in. And I think trustees should consider these assets in their investable universe. I think the key test is, do they improve net risk-adjusted returns after fees to members in the long term? I think that's the key test in terms of being in members' interests. But I don't think it's just the illiquidity premium that is of interest here. A lot of private assets provide regular income. They can provide smoother returns and they provide diversification into different industries that just aren't available on public markets. So I think the drivers of returns from these markets are quite broad. And I do think it's -- I know words matter, but it's unfortunate that we use illiquids to describe them because it's really the least desirable element of their characteristics, and I like to look at the positive things that they can bring. So I think for trustee boards, really need to look at the evidence and satisfy themselves that the private markets fit with their long-term investment beliefs and that they are appropriate for the size and the duration of the scheme. And particularly, I think the consolidation issue is quite important because I hold some Master Trust appointments, and we're seeing those Master Trust grow in size. And I think we have a duty to make sure that consolidation actually benefits members, and it can benefit members by opening up the types of investments that they couldn't get before and the outcomes of those. So I guess the proviso is that it needs careful implementation. This is Active management with the capital A and to deliver those enhanced net returns, I think we'll need to increase our investment governance [indiscernible] and our efforts. And what my experience suggests that this does result in good improvements in net returns, the implementation is key.

Thanks, Dianne. Yes. So you're bought in, but it's not as simple as it's perhaps made out to be. I've got a couple of questions that have come through. Just questioning and understanding about the performance charts, Felix. So one of the charts or one of the questions said, your chart shows a positive in every year. Is this representative of the whole market? And the performance stops at 2021. Is there anything more recent available or is that because they underperformed public markets since then?

Yes. Great. I'll take them one at a time. So the first one, is this representative? The short answer is yes. I mean, so Barclays last year and then Schroders more recently, both done sort of analysis over long periods of the wider market and fairly consistent outcomes of 3% to 4% outperformance over a sort of longer term sort of 10-, 20-year horizon. So yes, is the short answer that it is pretty representative of the wider market. Moving quickly to the second one. That's about the more recent data. Two answers to that one. The first off is, it is quite difficult to get data because of the nature of the market. But the key thing about private equity is because you're investing for a longer period of time, the sort of key returns on that are the longer-term ones. So looking at the sort of what private equity has done for me in a one year period where it's a 10-year commitment of funds doesn't really give us many answers. So I think in this asset class, we'd always be looking at the longer-term returns so that means so much more when you're investing in them.

Thanks, Felix. Yes, the classic J curve where the costs upfront lead to negative returns initially that then come through, which is a fairly established part of private equity investing. Let's move on and let's build this discussion up with the presentation from Mark about the ideas that he's got around how we can get DC schemes more invested in illiquids.

Thanks, Simeon. So as Felix mentioned, if we just follow the same principles as used in the governance analysis, an allocation of 20% to private markets could contribute an additional 12% to member's lifetime pension pot. And we think that's a prize worth pursuing for members, but it's not a new conversation. So what's been holding schemes back? Well, we think the main nervousness is just caused by the illiquidity and the operational problems that follow from that. But it's also related to a lack of products to choose from, and that puts us in a supply and demand loop, which we'll go on to discuss. But with that in mind, we've put forward 4 ideas to help bolster investment in illiquid assets within DC schemes. So the first is to consolidate but focus on small and medium-sized schemes only. Investing in illiquid assets require size and it's much easier with large positive net cash flows. So a large number of smaller DC schemes will need to consolidate to access private markets. They could do that by combining schemes, transferring to a Master Trust or perhaps consolidating by pooling investment strategies by making use of off-the-shelf DC investment products. But from our observations in both DC and DB schemes, if assets are approaching about GBP 1 billion, then there's more than sufficient scope to have a sophisticated investment strategy. DC schemes do admittedly have a bit more uncertainty regarding their ongoing membership. And so realistically, a DC scheme might need a little more, but certainly, assets of at least GBP 1 billion should give sufficient scope to get the whole benefit from investing in private markets. We just don't think that really the conversation is pointing to GBP 30 billion or GBP 50 billion DC mega funds is necessary. And actually, it's quite counterproductive to keep pushing that discussion to schemes that are already of sufficient scale to invest in private markets anyway. The second idea is to reduce available liquidity for members. It's perceived that members need voluntary access to their funds at all times, but savers can't access their pensions until they're aged 55 anyway. So the savings horizon is decades long. Daily liquidity that's usually on offer to members is considerably more than the vast majority of members can reasonably benefit from or indeed actually need. If we can impose an element of illiquidity upon members, it would enable greater allocations to be made without any real detriment to them and relieve that nervousness about operational illiquidity. But perhaps statutory requirements could be changed so that a proportion, maybe 20% of a member's savings could be locked up for a year or perhaps longer if needed, just to help smooth out those cash flows. And when you think about it for younger members certainly, the only real downside to that approach would be that members don't have access to move their savings around. And those are savings that they can't access for years yet anyway. Third idea is just to increase the sophistication of available default offerings. Providers have existing commercial agreements, which hinge on the overall cost of investments. And so it's difficult to meaningly increase allocations to higher-cost private market assets without an increase in those overall charges, which kind of makes it implausible for them to move clients to a more sophisticated strategy with our prior agreement. So we think providers need to build more alternative, more sophisticated, more illiquid, more expensive offerings and successfully convince their clients to move them to move across to those offerings. And in doing so, that will really help unlock large investments in private markets from DC schemes. Finally, it's the demand side of that, trustees and employees need to get on board. So if sophisticated strategies to take off, we think the trustees and employers need to promptly adopt them when they're offered because without that take-up, the commercial case for further development won't be successful, which in term prohibits innovation and development in our industry. It would also be helpful to entry into Master Trust to have conversations around the fact that investment strategy should evolve, market conditions change and developments change. And so investment strategies may evolve, costs may change in the future and be different to what they are in implementation. To have that conversation, it's important to trustees and employees have sufficient knowledge and understanding to make the right decisions for their membership. But I'm not saying that because it's a barrier in itself. In our experience, trustees and employees are knowledgeable. And if there are any gaps, they receive some independent advice to help with that. But perhaps those that are inadequately resourced, should be made a better evidence the suitability of the chosen investment approaches. We set out these 4 ideas in a paper that's available through the console and separately on our web page for further reading. But I guess, importantly, all of those are ideas to drive allocations higher and it's all really for the future. What can be done now to help get started on allocating to private markets or illiquid assets. So we put on the Slide 3 steps along the way. I think the first is just to explore the potential benefits, explore how private markets might improve outcomes for your members and agree in principle whether they're of interest or not? Secondly, understand the practical barriers for your scheme, assess your own arrangements and analyze your expected cash flows because that will help you establish the likely need for any upcoming liquidity and any potential pinch points that you might face. Alongside that, assess your platform provider or if you don't use one consider doing so and investigate the pros and cons because through a platform, you can invest in blended or known as white labeled funds sometimes, which are simply funds of funds designed by trustee groups. And they can help future-proof investment strategies because it's easier to make changes underneath those blended funds, which means that changes are easier to make without large communication exercises or administration headaches, but they can also be used to blend a larger liquid allocation with a smaller illiquid allocation in much the same way has been done in their multi-asset funds for years. And the third, of course, decide on how to proceed. We think actually forming an opinion now in the first half of the year will be important ahead of changes that are following the statement of investment principles later in the year.

Thanks, Mark. Yes. So it's not one thing that needs to change here. There's a whole package of changes that need to come through in order for the ambition to be realized. Just looking through the questions that have come through. Thanks, everyone, for the questions received so far. Please do continue to submit them. One of the questions is, what could the U.K. government do to make private assets more attractive? And that fits neatly into the next planned slot, which was Melville to talk about what we can see from the government and regulators to facilitate more investment in illiquids. So Melville over to you.

Thank you, Gideon. And delighted to share what was an excellent question, homing in on government policy. So let me focus on 3 suggestions. First of all, the government has introduced into legislation, the long-term asset fund, the LTAF. It operates as an open-ended fund where redemption notices are 90 days or more. It's been on the statute book from November 2021. But the last, the current take-up is low. We need to address the barriers which are inhibiting more LTAF launches. And one of the issues which I've looked to highlight are the platforms. They need to embrace the fact that they're currently wedded to daily dealing funds, they need to accommodate the LTAF. I'm delighted that Mithesh will talk about the manner in which Mobius has looked to take forward solutions in the context of the LTAF. Secondly, government, and we have the prospects of the general election later this year. Please, may we have for this new government during its term a single pensions minister, a single city minister because the last, over the last 8 years, we've had too much ministerial churn, 8 pensions ministers, 7 city ministers. We need to be able to develop policy and grapple with what are challenges. There are trade-offs which need to be made at a policy level, and we need courage at that governmental level to take those questions. And one of them undoubtedly, in the pension space is the challenge of under saving and how do we address that challenge. And then thirdly, I'm focusing on all of us in industry, we need to consider best practice, how we can approve -- improve our focus on research, our confidence in the private market assets, the alternatives, the liquids, having confidence that we understand their dynamics and recognizing that we need to take this agenda forward and not wait for the regulator because already, we have the danger of regulatory overlook. Let's take up that initiative, learn more about what are the dynamics, the trade-offs, the medium to long term, the focus from liquids to illiquids and recognize that we have that wonderful goal of offering to investors, particularly those in the younger generation, the prospects of better returns. The overall goal must be a recognition that British pension holders must no longer be missing out.

Thanks, Melville. I like your comment about one pensions minister. I think one Prime Minister would be a good start. Now I'd like to open it up into the wider panel and involve Mithesh for the first time so far in the proceeding. So we've had a question come through. Now this isn't directly aimed at you, Mithesh. It's more picking up on something that Mark said earlier. But I thought it would be helpful to get your perspective on what's currently possible in terms of allocations to private markets. So, the question -- sorry, let me just bring it up. Why is it necessary to change the liquidity of individual parts? Not every member will transfer at the same time. And so surely, you can operate investment strategy with ranges that ensure liquidity is delivered when required. So you're very familiar with what's already achievable even within the current sort of regulatory environment. Can you tell us a bit about the sort of size of allocation that you can access currently?

Thanks. Yes. So the way in which schemes could allocate, Mark touched on earlier, the kind of the mechanism of a white label fund structure, if you have your liquid assets in your accumulation phase and have your illiquid assets, you can almost use your liquid assets to pass day-to-day cash flows through. So actually at an individual member level, you're not having to really put any constraints because there's enough liquidity in the scheme, ongoing payroll, contributions that actually mean if you were to allocate today 20% into your liquid fund, actually, you won't be deploying capital into that fund every month. It will be quarterly or there's a notice period. So actually, you'll find that actually there's a reasonable degree of liquidity that scheme may have at hand. But that's part of the homework I think, working out for a scheme. Is it right for you? Do you have the right demographics, where are you using the illiquid exposure within that kind of lifestyle journey. If it's earlier on, as Mark said earlier, you can't access that capital. So actually, you're not going to have any natural liquidity stress on the portfolio. Whereas if you're thinking about using illiquids later into that kind of preretirement and post-retirement, then you really need to think about the characteristics of the type of asset and how does it fit in the overall scheme, that answers the question.

Thanks, Mithesh. And what sort of allocation to illiquids do you think is feasible currently?

So I think we can get towards 20% as being probably the right level because there's a trade-off between how much the scheme can survive in a kind of a stress scenario if equity markets fell or if you had a large core members leaving, you need to allow for that illiquid exposure to go overweight for a period of time before you can kind of sell that liquid asset because of the nature of the cycle. But also, there's a cost implication. As we said earlier, it's active management, you're paying for those fees. It's more what is the scheme willing to wear in terms of if I started at 20% and actually through passage of time, I was 25%, 30%. What does that mean in terms of the overall AMC that member is paying. So it's important to work out what's the right level for a scheme and right size that allocation.

Thanks. And Dianne, in terms of your clients and how they're accessing illiquids, how are you doing that? And what sort of allocations are you seeing?

Well, I think most large schemes and certainly large Master Trust who were benefiting from consolidation are looking at developing their illiquids policy quite seriously at the moment. And I think this involves working with their investment advisers and platforms to develop the right infrastructures. I have one scheme with a formal allocation of up to 15% in private markets. But I think I would emphasize that the development of that is quite slow. So getting set in these kinds of assets takes time, you do have to be very careful. And so something like that allocation, it might take 5 years to get there because you really want to develop a proper strategy and the program. So I think that's why some people we talked about terms before, but sometimes the sector is referred to as patient capital. And I think that's a really good term to describe it. You do have to have patience in getting set. I think also private markets, I see it as a continuum. I mean we've probably all invested in private markets, in property. That's probably the one market that we're all used to, right? It's not listed. It's direct. It's tangible. But to my mind, it also -- if you look at the list that we've been given for our kind of disclosed or explain, it's infrastructure, it's private debt as well as the kind of more the things that people see is more racy like private equity and venture capital. So the way that I've seen portfolios developed is that they started the least illiquid part and kind of things that are more tangible and people are familiar with both employers and members and then building that portfolio out from them. That does include LTAFs and I think they are a good beginning solution and a good product to allow trustees to put their toe in the water and I think working with those platforms to include them and blended funds is a good first start.

Thanks very much. We've got a skeptical question here about, is the focus on illiquids just political optimism? So perhaps Melville, if I can direct that question to you, would the government be as keen if the illiquids were in the U.S.? You having trouble with your microphone there, Melville? I think we may have some connection problem with Melville. So I'll perhaps direct that one to Mark. If you can give me your perspective on -- if the focus on illiquids is just political optimism and whether it's just grounded in a bias towards the U.K.?

Yes. I think there's a political bias. There isn't there from the government's point of view. Assets have been flowing away from the U.K. for a while as pension schemes, DB and DC have been more regionally diverse and avoided that U.K. bias. So I think there is an optimism from the government to direct money towards U.K. unlisted equities. But I think from a trustee point of view, actually it's in-built in legislation to have a diverse portfolio to avoid undue concentration of risks. And I think realistically, what we're saying is, there's a long-term benefit from investing in private markets. And naturally, that would be diverse by asset type, by region perhaps by manager as well.

Thanks, Mark. Now can I just check if we've got -- Melville has dropped off. So I think he'll be reconnecting to us. So hopefully, we'll see him shortly. A question about private equity funds in general. What sort of number of private equity funds are -- perhaps a direct question first. This is probably one for you again, Mark. But Mithesh, you might have a view as well. What sort of number of private equity funds do you need to be allocating to get diversified exposure?

I think my honest answer is, it depends, I know that's a consultant's answer, but it does depend on what type of funds you're investing in. If it's a private equity specific fund and you want a diverse allocation to private markets, you need more than one. Certainly, I can think of some products at the moment that are diverse by the different assets that they invest in the types of private markets. But of course, that takes one diversification box, but it might not tick by manager. So if manager diversification is important as well, then we're into 2. I think past that, it's probably starting to get too complicated unless you are of sufficient scale that you're starting to put stresses on that management the ability of that fund to proceed.

Thanks, Mark. I think it's probably worth pointing out that we typically allocate private equity through fund of funds. So you've already got a considerable amount of diversification through that arrangement leading to not having to have an excessive number. Melville, I think we got you back. Can I just check?

Yes, I'm back. Thank you.

Yes. Great. Well, if I can get your thoughts on that question around is this allocation to illiquids politically motivated? And would the enthusiasm be there if it was investing in U.S. assets.

Yes. And that's a very good question because it's not, I would suggest just the political dynamic. It's the recognition of what are we offering for the benefit of pension holders for the medium to long term. And it's clearly recognition of the need for the better returns, but also looking at the younger generation, their interest in sustainability. The need for a productive returns as Dianne referred to, but one in which we can look forward at addressing transition strategies, the journey to net zero and how institutional capital, including from DC can contribute to those goals. So it's a combination. Yes, there's a political desire from government, but equally from pension holders, the desire for those greater returns and an alignment of other goals, which pension holders may share.

Thanks, Melville. So I think time has come for us to move on to some of the other DC topics, but we'll come back to your remaining questions at the end of the session. Now I'm going to ask Sophia to talk about the decumulation in -- following from the TPRs recommendations in that area.

Thanks, Simeon. Yes, this is sort of, I guess, the second big topic for 2024. And really, where it comes from is the DWP are worried that there are material amounts of savings already being taken by DC members from trust-based schemes without sufficient support. So they set out plans, how they want trust-based schemes to help savers access their pensions. And their aim is to implement this through legislation and to put a duty on trust schemes to offer members access to decumulation products. But we've mentioned this already today. There's an election on the horizon. I think there's a recognition that it's not going to happen this year. New legislation is going to happen this year. So in the meantime, the pensions regulator is going to issue some guidance later this year, which will help trustees move earlier. But the DWP ambition is that ultimately, all trust-based schemes will help savors manage risk as and in retirement by providing access to suitable products. The second thing is that old trust-based schemes should provide a range of decumulation options. So not just one option, but interestingly, including a default option for those who don't engage, and that's quite a new concept for all of us for at retirement, offering something that people default into. And then the third thing is that all trust-based schemes should provide meaningful support for members to help them engage and make decisions. So we think decumulation is a crucial third pillar to good member outcomes. So we really support this. Members need adequate contributions. They need the good investment outcomes that we've sort of been talking about and they need appropriate retirement choices. And this is supported by our research, which shows that members who have access to the full range of flexibilities and in that I mean access to a flexible drawdown product, to cash lump sums and to purchase some annuity. They make better choices. But despite this, only 11% of the DC schemes in our research offered their members the full range of options. So it's clear this is an area that needs some focus and some work. So what should DC trustees be doing and what can they be doing at this point? As we move on to the next slide, we set out sort of 3 key steps. The first one is to offer access to a drawdown solution. Now it's unlikely you'll want to do this within your own scheme, but you can look to partner with a third party. And in our experience, that's usually with a Master Trust. Many of the Master Trust offer an at retirement section, which you can bolt on to your scheme to provide your members sort of smooth access to draw down. And we've held a number of clients put this in place. So it is a tried and tested path. I think if you choose to do this, we would recommend you do, do it, but the things to consider are just making sure the fees are competitive, so that members are getting value post-retirement. Looking at your investment strategies to see if you can get it to marry up to the Master Trust strategy at retirement, so in a sense, creating a to and through investment journey for your members. I think importantly, communicating all the options clearly without straying into advice. And then finally, putting in place good governance, including ongoing monitoring. The second action, I think, trustees can do now is and be more proactive in providing guidance and support to members in the run-up to retirement. So things like delivering more personalized communications and nudges, providing access to retirement planning guides and modelers and actually providing access to advice for those who want it. These 2 things are the sort of the first steps and things that you can do now and that others are doing and as the market evolves, there will be more options available and this concept of having a default will come down the line. So I guess the third action I've got here is watch out for the regulator's guidance, which we're expecting later this year. So Simeon, there is sort of, in a nutshell, this sort of -- I think it's quite an important area for trustees to be thinking about over the coming months.

Thanks, Sophia. And picking up on the point about waiting until the TPR guidance becomes available. A question for Dianne is how are you addressing the decumulation discussion at the moment in advance of that. Sorry, Dianne, I don't think we can hear you. I'm not sure if it's the same issue that Melville was having or you can try pressing F5 to reset the refresh the screen. Well, while Dianne is sort of on a technical issue, perhaps Sophia, if I could ask you the question of what should trustees do in advance of the guidance coming out?

Yes. So I would say don't wait for the guidance. I think the guidance will be helpful, but we don't expect it will change anything that the 11% of schemes are currently doing. They have looked at it closely. There is a bit of a try and tested path yet to follow. And I think the important thing is that members need something now. So I would say, certainly start looking at this, it is possible to put -- we're not going to have the legislation and the bigger proposals for a little while longer. So I would start looking at it now would be my position on that.

Thanks. And Dianne, we got you back, I think?

Can you hear me?

We can. Yes. You happy to answer the question [indiscernible]

No, I would really reinforce that. I've got schemes where the trustees work really closely with the employer to provide guidance and advice where it's needed. Sometimes the take-up is not what we would want, but where it does get taken up, the feedback is really good. And I think what you're looking for is confidence that the members have made some good choices. I think secondly that a lot of the really good Master Trust providers are really focusing on regular communications because unlike an accumulation, the retirement phase involves a lot of monitoring, a lot more monitoring of what's going on with your income and your portfolio than it does when you are saving. And so those kind of nudges and comes at a regular basis to say, are you withdrawing too much or not enough or whatever. I think they're becoming really, really important to help members manage the process in retirement, especially when this is early days and people having 100% DC portfolios to rely on, and there's no certainty. So that support -- that decision support is vital, and I would just emphasize what Sophia is saying, the sooner the trustee embrace it the better.

Thanks very much. Well, with so much going on, it can be difficult to keep sight of the key tasks. So Felix is going to cover what the key things need to be on your 2024 to do list. Over to you, Felix.

Thanks, Simeon. Yes. So the first item for your calendar is from the 2023 regulations in respect of chair statements. So these are effective the first scheme after the October 1, ‘23. Now this is the requirements are just to provide more detail on what's under the bonnet. So a greater breakdown of assets in the default arrangement, including probably look-throughs to underlying assets where multi-asset funds are used. And there's also greater disclosure requirements on performance fees as well. So the other regulation point is the Statement of Investment Principles or SIPs, will need to contain a policy in respect of illiquid assets by the October 1, '24. So it just moved along the calendar there at the top. If the default does have illiquids, their requirements to include some information about why and the details of the illiquids held. If the default does not have illiquids, they need to explain why and whether there will be illiquid investments in the future. And I think that's -- that sort of discussion point is really good to have those discussions now and get planning ahead for when sort of the market reacts and as it evolves. Moving away from compliance disclosures to the bottom left of my calendar. Overall investment governance at the moment is a really key issue. With the recent release of ESOG, so the guidance around effective system of governance expected to come into force on the 27th of March. So more broadly than this, it is a key focus, and we're trying to help our clients at the moment with an overall mapping of exercise of how well their investment arrangements fare against industry minimum compliance and all the way to best practice and we're calling this our investment in focus framework. So obviously, if you'd like to find out more about this, please do get in touch. Moving on to what's around the corner. There are many areas of ongoing consultation at the moment, and you'll be delighted to hear I'm not going to go through them all. But decumulation is one to have in your calendar for later on this year. We've heard from Sophia and Dianne as well. There's going to be a big focus on what options members have at retirement. So looking at these concerns that many members just end up into what default solution is there due to lack of engagement and options available to them. So the last item on the calendar I'll raise is one that affect many hybrid schemes. So with Gilt movements, DB schemes, as you know, have had some great funding levels at the moment. So we are seeing huge volumes in the risk settlement market. Now that doesn't just affect DB pensions. We're aware of 2 key areas that affects DC pensions as well. So the first one is how any surplus may affect or brought in to align with DC benefits. And the second one is AVCs, often the forgotten topic of the DC world. So getting ahead of the game and having discussions on these areas, I think it's really important now both in terms of member outcomes for the DC benefits but also for support and to help those DB transactions move along swiftly as well. That's my outlook for 2024, Simeon, back to you.

Thanks, Felix. And perhaps Mithesh, if I can ask you what your DC clients are focusing on in the coming year?

Thanks, Simeon. Yes. So much of the conversation is asked around private markets. There's a couple of clients that we are pursuing to kind of deploy some capital for them. But also, it's the conversation. So I think a lot of education around what's possible, what types of assets, what works with the scheme and working with the consultants. And we're starting to also see, I guess, from the asset manager side, thinking about product development around for decumulation, what can they provide in terms of what are the right structures as you go pre and post-retirement and some of the Master Trust are also thinking in that space. What are the options and how do they support schemes, whether as you mentioned earlier, whether they can support the deferred members or the active retirees kind of split the sections of the schemes.

Thanks very much. So we've still got lots of questions coming through. So let's work through some of these. So given the political elements, so I think this is perhaps one for Melville but we're going to get Dianne's perspective on this as well. So I'll start with Melville. Given the political element of this policy, what does this mean for trustees who are supposed to be acting the best interest of beneficiaries. So this is going back to the illiquidity point. What does this mean for trustees who are supposed to be acting in the best interest of members where trustees are effectively being used as pawns to address government failings? So a bit of a viewpoint been expressed there. But Melville, what are your thoughts?

Yes, a very good question and a perennial issue which arises because of the tension to do with the fiduciary duties of the trustees and the recognition that government may have other agendas. What we have to look at is where we can have an alignment of interest, where recognizing the fiduciary duties improve returns for investors is the key objective. And if that can be aligned with achieving these other goals, whereby, yes, government policy is benefited in terms of investment. But also, as I mentioned earlier, the pension holders, the age cohort, it may be that younger generation where they would prefer a greater focus into sustainability and net zero transition strategies. Dianne?

Yes. I think most trust professional trustees would say that the political pressure isn't really a high priority, if I'm allowed to say that because we follow our fiduciary duty, and that means pursuing the financial interest of our members. If that coincides and some good outcomes, that's great. But the best thing that the government could do is give us some investable assets that we can rely on. And we'll generate those returns. So if you think about it, the U.K. is very short of -- it's got a long list of infrastructure that it needs right now, and I think there's investable money in pension funds. If the 2 could be put together in some reliable structures, then I think that would be good. But diversification is the number one rule for trustees when it comes to investment, and they're going to look at it as a global portfolio. And I think that was very much mentioned in the Mansion House statements that the golden rule is that it has to be in member's interest and trustees very much the leader in that principle.

Thanks, Dianne. So I'm going to take one last question. I'm actually going to combine 2 questions. So this is to Sophia. Now it says that you mentioned that members make better choices if they have access to the full range of flexibilities, how are better outcomes defined? And in particular, is there a long enough period to measure this over? So that's the first part of the question. Then the second part is, how does this all fit in with Pot for Life that also links to member decisions and flexibilities.

Okay. That's a whole different pot, whole different kettle of fish [indiscernible] Pot for Life. But if I tackle the first one first. Yes, it's very difficult to measure outcomes because they are -- it is a long-term sort of journey for members who really get to retirement. But when we did our research, one of the things we've looked at was we saw that people who didn't have the choice of going into a flexi-access drawdown product transferred -- either took their money as cash or transferred out to a more expensive product. And looking at the kind of fees that they're paying, the higher retail fees they're paying could result in them running out of funds 8 years earlier than if they transfer to a lower cost vehicle such as the Master Trust. So just based on that alone, the sort of the costs that they're paying, you could -- that is one way of measuring the outcomes that they could get. Obviously, there's lots of other features to think about and look at, but that was certainly one compelling reason. On the other question, so how does this kind of link into Pot for Life? I think Pot for Life, it is an interesting question. It is something that we may have in the future. I don't think it's going to happen in the short term. So I don't think it's the kind of nirvana, the answer to everything at the moment. It is a longer-term policy, I would guess if it comes in. So I think trustees, probably not asking quite the question, but the trusses should think about this now and sort of -- this is the danger with the Pot for Life consultation that everything gets parked because Pot for Life is the answer to the universe. But it is a longer-term thing, so we should be moving forward with things like this now.

Well, thanks very much, Sophia and thanks for all the responses that we've received from the panel. Right at the start, we gauged your appetite to invest in illiquid assets in terms of the benefit to members. So we've got another polling question to probe that a little bit further and perhaps reflect any thoughts that have developed during the course of the discussion. So the question is, if current industry constraints could be overcome, what do you think would be a desirable level of private market assets within the average DC accumulation funds, this is before retirement? So the options there are for the skeptics of illiquids, we've got 0%, and then we've got 0% to 5%, 5% to 20% and over 20%. And of course, if you don't know, feel free to click that you don't know. I thought I'd summarize, there's been a number of aspects that have come out during the discussion, but a few that really struck a chord with me was the point that focusing on return solely is actually overly simplistic, and there's a lot more to this than just that. In particular, there's wider goals that can be pursued through investing in a wider array of assets involving illiquids such as ESG goals. And Mithesh made the point that actually schemes could probably allocate up to 20% even in today's environment using the current approaches to accessing illiquids. So there's plenty that can be achieved already. Now hopefully, we've had a few respondents on the survey. So if we bring the poll results up on the screen. Let's take a look. That's interesting. So yes, so the majority are bought into a substantial allocation to illiquid. So I'm not sure if it's a slightly different question or whether we've convinced some people that there's merit, but that's exciting to see. And I think it says a lot about the direction that we're going to be heading in the coming years. Now if you'd like to find out more about how you can introduce illiquid to your scheme. We've got a feedback sheet, a little pop up on your screen and you can indicate there whilst you're also providing feedback on the session. Our next event will be on the 7th of March at 3:00 p.m. on the topic of cybersecurity, getting the fundamentals right. We will be joined by industry experts who will share insights on what trustees and employers need to be aware of with regards to managing cyber risks. We appreciate if you can please take a moment to complete the feedback that will pop up on the screen, and it really helps us focus the events in the future and what you want us to talk about. You will receive an e-mail tomorrow, which will include your CPD certificate for this session. And that just leads me to thank the speakers. Dianne, Melville, Mithesh and of course, our XPS experts, Felix, Mark and Sophia. And thank you for joining us today. I wish you a good afternoon, and we look forward to seeing you on the next event. Thank you.