CIO explains the scheme’s plans to introduce private markets to its default funds, using new LTAFs to balance liquidity, cost and impact
Aon’s DC MasterTrust has stayed within public markets while the firm’s broader investment business built deep experience in illiquids through its fiduciary management and defined benefit (DB) portfolios. Now, as regulatory and operational barriers ease, the CIO of Aon’s defined contribution (DC) solutions business Jo Sharples believes the time is right to bring private assets to DC members.
Aon has managed its DC MasterTrust since 2015, but until now its default funds held only listed equities, bonds and diversified liquid strategies. “We’ve had private markets portfolios for our DB clients for years while DC has only started to unlock private markets relatively recently,” Sharples says. “The trends are almost directly opposed – DB schemes are reducing exposure, while DC is just ramping up.”
Aon intends to launch two long-term asset funds (LTAFs) early next year and to integrate them into both of its MasterTrust default strategies. Each will play a distinct role: a growth LTAF targeting long-term, above-inflation returns for younger savers, and a retirement LTAF designed for those approaching or in drawdown, focused on stability of returns and income.
“The first default is all about growth in the early years,” Sharples explains. “The second is more liquid and focused on retirement, recognising members close to retirement don’t want to see their fund value move that much. Our goal is to get the first money into the default in the first half of next year.”
Aon plans to build significant allocations – around 15% of the default strategies for both the growth and retirement stages – phased in over about three years. “We’re not going to shift the dial for returns and impact if we only put a couple of per cent in,” she says. “We want decent-sized allocations. From a performance perspective that should be great for members, and it means we’ll comfortably meet our Mansion House Accord commitments.”
We’re a Mansion House Accord signatory but we’re taking a fairly measured approach.
Jo Sharples, Aon
LTAF architecture
The growth-oriented LTAF will hold a broad mix of private equity, infrastructure and real estate, with room for opportunistic allocations such as natural capital or private credit. Liquidity will be managed at the overall default fund level rather than within the LTAF itself. “If we get the structure right, we’ll be able to manage the liquidity within the default,” says Sharples.
The retirement default’s LTAF, by contrast, will concentrate on short-dated private credit, with instruments maturing in two to three years to provide a rolling source of income and liquidity. “It’ll be mainly fixed-income private credit,” she says. “We’re focusing on shorter maturities. Infrastructure and real-estate debt tends to be too long term and too volatile for what we need.”
Together, the two LTAFs will sit under a single umbrella but pursue “very different asset strategies”, she adds.
Aon’s move follows months of client engagement and education. “We’re a Mansion House Accord signatory but we’re taking a fairly measured approach,” says Sharples. “We started by talking to our clients, providing education, getting feedback and sensing how they feel. DC clients are interested in private markets but also quite cautious.”
That process has shaped Aon’s design. Sharples points out that DC members’ preference for daily pricing and visible value has long been at odds with illiquid assets’ characteristics. “It just wasn’t practical or possible ten years ago,” she says. “But the government has done a good job setting up the LTAF regime – it’s been a game-changer. It cuts through challenges around permitted links and makes it much easier to put funds on platforms.”
Equally important, she argues, has been a cultural shift among asset managers. “The traditional 2/20 fee model doesn’t work for DC,” she says. “But managers are moving. We’ve spent a lot of time helping them bring solutions to market and explaining what would work.”
Overcoming challenges
The global scale of Aon’s consultancy business gives it leverage to negotiate. “Some managers are very keen to get into the DC market because it’s growing so fast,” says Sharples. “We might only give them a few million from the UK MasterTrust, but overall, if we’ve given them billions from elsewhere in the company, we can get some fee discounts.”
That said, she is pragmatic about performance fees. “I would pay them, but they have to be structured properly,” she says. “If you’ve got the right hurdles, it can give you alignment. If you’re getting strong performance, it might not be such a bad thing to pay a bit more.”
She has had realistic debates with trustees. “They recognise that the alternative is not to be able to get private assets into the strategy – or to have less of them,” she says. “You’ve got to be careful what you’re screening out by not accepting performance fees.”
Sharples acknowledges that cost remains a barrier across the industry. “There’s no getting away from the fact that higher costs are an obstacle,” she says. “The danger is how they’re treated – how transparent they are and how they’re disclosed. We’ve spent a lot of time thinking about how to get to a position where we’re unafraid to disclose costs in a transparent, fair and consistent way. If we can get to a better place, it might unlock more and bigger allocations.”
One of the key technical hurdles for DC schemes is the private equity J-curve, where early-stage costs and delayed gains can disadvantage members who join or leave at the wrong time. Sharples says Aon is favouring evergreen or open-ended structures where possible. “You buy into an existing portfolio that may have a long track record, so you get good visibility and a spread of investments,” she explains. “Open-ended structures really help to mitigate that.”
A blend of fund types can also smooth the ride. “You have to keep an eye on how they’re trading and what redemption queues exist,” she notes. “Having a mix helps to mitigate J-curves.”
Cautious optimism
The government’s wish for DC schemes to invest more domestically has become a recurring theme since the Mansion House reforms. Sharples sees the appeal but warns against the danger of over-bidding for assets while supply remains constrained.
“We’ll target a proportion in the UK but keep allocations flexible,” she says. “If we overpay, we’ll obviously get a lower return. We don’t want all pension schemes fighting for the same assets – that would only be great for whoever owns them now, perhaps a Canadian pension scheme.”
While she supports the policy’s intent – “it will be good for all of us if we can get the economy to grow a bit more” Sharples stresses fiduciary responsibility and that value must come first. “I’d rather make investments willingly,” she says. “But if schemes don’t do so, I can imagine that the government will eventually consider mandation to be the answer.”
The main goal is outcomes for members. If we do it properly it should mean higher returns without necessarily more risk
Jo Sharples, Aon
Sharples expects the LTAFs to deliver not only returns but measurable impact. “Impacts must be consistent with our net-zero commitment,” she says, “but also with social benefits such as job creation, wider social and environmental outcomes. The main goal is providing good outcomes for members. If we do it properly it should mean higher returns without necessarily taking more risk.”
She also highlights stewardship as a differentiator for the master trust. “One of the attractive things about private assets is that you have much more control over a company’s direction,” she says. “When you go private, you might be one of only a few investors, so if you want to enact change, you have a much better chance of doing it.”
That ownership concentration, she believes, can also advance its climate objectives. “With private companies, you have more chance of meeting like-minded investors,” she says. “You could see more change happening. So it could potentially be very positive.”
Scale and outlook
The Aon MasterTrust and its sister DC solutions now manage over £25 billion globally with nearly £12 billion in the UK across all sections. “We look at them as one, because they share a common platform and funds,” Sharples says. “It’s all growing very quickly.”
With high annual inflows, she believes the Aon MasterTrust is on course to reach the government’s informal benchmark of £25 billion master-trust scale within a few years. “We’re super-confident we’ll achieve that,” she says. “And we would consider acquiring another master trust if it was the right thing to do.”
Scale, she argues, should not be seen purely in terms of the assets within the master trust. “For a scheme like ours that sits in a large global consulting business… we already have enough scale, because we tap into the scale of the company,” she says. “We’ve got 60-plus people doing fund selection, far more than any standalone master trust on its own.”
Sharples is also careful to place Aon’s plans in a broader macroeconomic context. The UK’s sluggish growth and uncertain fiscal position inevitably influence investment strategy. “One thing looking very attractive at the moment is government bonds,” she says. “There are some definite pockets of value there.”
When it comes to UK private markets specifically, policy stability is critical. “Having more certainty about regulation is always a good thing when you’re locking up capital,” she notes. “If you’re going to get a 10% return on a US utility and 4% on a UK one, you would probably go for the US one. The challenge for the UK government is to make sure that when investors see two equivalent assets, the UK one is equally attractive.”
As Sharples points out, pension funds are stewards of members’ savings, not state capital. “We must give them a return,” she says. “If we’re going to lend or invest in a regulated utility or other government project, we need a competitive return. Maybe pension money isn’t always the answer – maybe that’s something government needs to fund directly.”
For now, Aon’s focus is on execution: building two sophisticated, member-centric LTAFs that bring private assets within reach of ordinary DC members while preserving liquidity and governance discipline.
As Sharples puts it, “More money at retirement means people can retire earlier, retire better – or even contribute a bit less during their working lives. That’s a huge societal benefit. If we can achieve that, it will all have been worth the effort.”