A roadmap to a resilient retirement

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

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. 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.

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.

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.

Risk Warnings

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.

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.