Smart Pension applies fintech savvy to master trust strategy
Utilising technology to reduce costs allows the DC workplace scheme to make larger allocations to private markets
Smart Pension’s approach to master trust design and implementation has been heavily influenced by its origins. Parent company Smart was founded in 2014 by an eBay marketing executive and a leader in the banking industry, trying to disrupt pensions technology. “We’re a fintech at heart,” says James Lawrence, director of investment proposition for Smart Pension.
Smart consists of two businesses, pensions technology business Keystone and a master trust based on its platform. Smart is based in the UK but now operates around the world, with “lots of big deals” for Keystone in the Middle East, Asia and Ireland, among other places.
“We saw a big opportunity with auto-enrolment starting in 2012. The pensions industry was not focused on technology – it was based on archaic platforms,” he says.
Smart Pension currently has 1.5 million UK members, which it expects to rise to 2 million by year end. The investment team led by Lawrence runs c.£7 billion of assets. “We expect that to increase to £10 billion next year, before scaling quickly towards the government’s aim for £25+ billion megafunds by 2035.”
Investors in Smart Pension include Aquiline, Barclays, Chrysalis Investments, DWS Group, Fidelity International Strategic Ventures, J.P. Morgan, Legal & General Investment Management, MUFG and Natixis Investment Managers. “There’s a lot of crossover between the investments that have been made in us, as a UK fintech growth story, and the investments we’re now making,” he says.
We have achieved some great efficiencies and that pushes down our costs to be very competitive with the biggest providers
James Lawrence, Smart Pension
Investment strategy
In May Smart Pension committed to allocating 15% of its AuM to private markets, expanding its existing exposure. “We will continue to scale quickly and expect to invest about £4 billion over the next five years,” says Lawrence.
It has been allocating to private debt for four years with Clearlake Credit, which was renamed after Clearlake Capital bought MV Credit. “It has our mandate for direct lending, which it does primarily in Europe including the UK,” he says.
The fund currently has a semi-liquid structure with daily dealing and is approximately 60% invested in private credit. “We’re going to unwrap it and turn it into a traditional 100% private credit fund,” he says. It will also start to invest in impact direct lending within the mandate.
His team is “quite bullish on private credit in the UK and Europe”, he says. “We think it’s a good market.”
In July Smart Pension announced a 5% of AuM allocation to an energy infrastructure partnership with Octopus Energy Generation, the renewables development arm of Octopus Energy. It will make an initial £330 million investment over the next six to nine months. “It will naturally scale over time, as we receive annual pension contributions of c.£1.1 billion into our flagship growth fund,” he says.
Octopus Energy Generation, which aims to benefit from synergies with the energy business, will build mainstream transition assets such as EV charging and wind and solar farms, as well as “more interesting and innovative climate and transition technologies”, says Lawrence. These technologies include using data centres to heat swimming pools, new sustainable forms of cement and creating carbon-neutral towns, among other things.
The third allocation will be to private equity (PE) and Smart Pension will announce the name of its fund-of-funds manager next month. “It’s going to be primarily growth PE with the remaining 20% going into venture capital (VC). It will invest in lots of different sectors including fintech, insure-tech, climate-tech, university spin-outs, the blue economy [of sustainable ocean activities] and sports and media technology.
While Lawrence is “pretty positive” about UK PE and VC, he acknowledges investing is more challenging than for its other allocations. “The UK is a relatively big player, but it’s still swamped by the US. We can’t focus too much on the UK as we need to achieve the right balance for our members.”
Across the three mandates, he says there are “many very interesting ideas that are going to resonate and hopefully make lots of money for our members”.
While Smart Pension has committed to the Mansion House Accord, Lawrence says this has not influenced its strategy. “We signed the accord, but were going to make the allocations anyway,” he says. “Our roadmap was already above its target, ultimately with a 15% allocation. But it was helpful to be part of the industry commitment and PR campaign.
“It’s also been helpful in sharpening minds in the industry. GPs are seeing big opportunities and are thinking about fees, fund structures, liquidity constraints and other barriers to DC pension funds.”
Fintech advantage
Smart Pension is technically a client of Smart’s technology business Keystone, alongside institutions such as New Ireland Assurance and the Dubai International Finance Centre.
“It provides more efficient administration than other platforms in the market. We’ve probably got the lowest average cost to serve each member of any UK scheme. Our technology provides very efficient and low-cost admin, which means we can spend more on investments,” he says. “It means we’ve got the headroom to do things such as PE, infra and private debt.”
Due to commercial confidentiality, it is difficult to assess exactly how much sponsoring employers pay in fees to master trust providers. “We tend to be in the low-mid range, not the cheapest but below the median. We price very competitively but not so low that we can’t allocate to the interesting and innovative investments that we find,” he says.
“We have achieved some great efficiencies and that pushes down our costs to be very competitive with the biggest providers.”
Performance fees
Lawrence says Smart Pension is “generally positive” about performance fees. It analysed the impact on individual members and designed a method that significantly reduces new entrants paying performance fees for past gains.
“We’ve found ways to minimise this problem,” he says. “We estimate performance fees and accrue them in the quarterly unit price, so new members don’t pay for everyone else’s performance.
“Generally, you can’t get the best managers without performance fees – it’s unreasonable to think you can. The best VC managers in the UK and the US would never accept zero performance fees. The best funds are oversubscribed and other investors are more than willing to pay their fees. We must be comfortable with them to compete, so that’s what we’re doing. We need to be pragmatic.”
Smart has opted to structure its allocations so each asset class has its own sleeve, rather than being combined in a multi-asset LTAF. Private credit will be in one fund. Infra will be invested in two funds. And PE will be in one fund-of-funds that will invest either directly or via other funds.
He says another benefit of its Keystone technology is being able to trade very efficiently on platforms such as Mobius. Keystone provides all the administration and member engagement technology while Mobius provides a fund supermarket-type institutional investment platform, which handles unit pricing, trading, fund lending, reconciliation and legals among other tasks.
“Mobius has been instrumental, as it can host complex funds and do a lot of the operational due diligence and legal work. And a big piece of this is that life insurance companies must be aligned with the FCA’s permitted links rules, which can be quite tricky for pension schemes,” he says. “Mobius has helped get us into lots of investments that other pension schemes just can’t do at the moment.”
Investors in Smart
The broad range of financial companies that have invested in Smart each present unique opportunities and potential conflicts of interest to be navigated. For example, the venture arms of Legal & General and Fidelity were early-stage investors – and both offer competing master trusts – while PE firms Aquiline and Chrysalis Investments were later and more significant investors that offer private markets funds.
“There’re strong internal walls between their VC or master trust businesses. We never discuss their master trusts, for obvious reasons,” says Lawrence.
“We think we got the best of both worlds. We’ve worked with some of our investors to build out investments, such as DWS and Natixis. As they’ve got a financial interest in us, we get very good deals on fees and can build out very interesting, innovative products that we couldn’t do with other managers.”
Nonetheless, it goes to market for every mandate. “For example, we invest with AXA, which has no relationship with our company. We work with our investors to see if they have anything interesting – but also go to market to find the best-of-breed solution.”
Full implementation will take around 12-18 months. “We have been invested in private debt for a few years so it’s already in place,” he says. “We are starting to put money into infrastructure this week and should be fully invested by the end of the year. We will start putting money into PE at the start of next year. A lot has already been done, so by the end of 2026 we hope to be a long way towards being fully ramped up.”
Key facts
Total AuM: c.£7 billion
Private markets allocation: c.5%
First allocation: 2021
Capabilities: Internal investment team, external fund managers
Private markets asset classes: Private credit, infrastructure (starting now) and PE (planned for 2026)
