Veronica Humble, Natwest Cushon CIO, talks to PMP about how real assets and venture capital can boost member engagement in DC workplace pensions
Natwest Cushon’s story began in 2014 as a fintech startup founded with the aim of simplifying the retail investment process in workplace savings. Originally known as Smarterly, its current phase began in 2020 with a rebrand as Cushon and the acquisition of Salvus Master Trust. It gained financial muscle in June 2023 when it joined the Natwest Group.
The fintech has always focused on investor engagement, formalised in its Better with Money campaign, and decarbonisation in its Cushon Sustainable Investment Strategy.
Veronica Humble joined last year as CIO after a long stint at Legal & General Investment Management that culminated in the position of head of DC investments. Her current role involves leading the investment strategy of a master trust that invests in private markets, with a plan to further expand exposures. She has a PhD in statistics and a personal interest in sustainability.
How much exposure does Cushon currently have to private markets?
Humble: Our headline strategy and main growth-phase default fund currently have a 15% long-term target for private markets. Just over two years ago we became the cornerstone investor of the UK’s first LTAF, Schroders Capital Climate+, a diversified portfolio of mainly private equity, infrastructure and real estate. We plan to gradually introduce other private markets asset classes but also vary the asset mix between the growth and at-retirement stages.
Our ideal strategic allocation would be higher. I can see us increasing it if various considerations are met. We are actively discussing this with our trustees and investment consultants. However, we do not have any immediate plans.
Which other asset classes are you considering?
Humble: We are adding natural capital, hopefully imminently, once everything has gone through final due diligence and trustee approval. It’s been a very long time in the making, but we are nearly there. We will be adding that to our existing mandate. We’re also reviewing our private markets allocation within our overall investment strategy review – but that’s still at an early stage.
Is natural capital an area you would allocate externally or manage internally?
Humble: Natural capital will be an external fund. All our mandates are currently pooled funds with external managers. Although we do not have plans to make direct investments in the near future we are already building other in-house capabilities, just not yet for private markets.
You can influence managers while they are launching funds. After that you can maintain an interesting dialog – but fundamentally the manager runs the investments. We had a productive dialogue with Schroders prior to launching the Climate+ strategy. Now we discuss it and receive updates – but ultimately it’s their fund.
Private markets are one of the primary ways we deliver sustainability
Victoria Humble
Is your main aim for natural capital to create impacts or enhance returns?
Humble: As much as we may like an asset class for its climate credentials or impact, the primary consideration is always its investment case. Each allocation needs an attractive return profile. Our climate framework assesses real-world decarbonisation and portfolio resilience in addition to the portfolio decarbonisation. Natural capital covers both objectives over the long term.
A standard portfolio could be negatively impacted by rising carbon prices. Natural capital doesn’t quite act as a hedge, but it has an interesting return profile considering likely future carbon prices. That’s the key rationale.
Do private markets help or hinder sustainability?
Humble: Private markets are one of the primary ways we deliver sustainability. You can’t achieve real-world decarbonisation simply by selling your oil shares and buying those of companies that are already more sustainable. We need to help companies transition their business models and finance new developments. Real-world decarbonisation is more important than mechanistic portfolio decarbonisation. This is one of the reasons we have such a focus on sustainability within our private market sleeve.
How important is private markets’ contribution to diversification?
Humble: There are always questions around how an allocation fits within our portfolio and within our investment risk and climate risk frameworks. Diversification is always a consideration – to ensure returns come from a range of sources that perform differently in different scenarios.
Private markets provide alternative sources of return and genuine diversification – and access to parts of the market that DC investors have typically not been able to reach. Private asset classes may also offer a liquidity premium – but you can’t assume there is one as, for some of the asset classes, there are no liquid investments for comparison.
Would Cushon consider making an allocation to venture capital?
Humble: Venture capital (VC) is interesting, as it has a very long-term profile that aligns well with the DC timescale. The returns are attractive, and it makes a lot of sense for younger members. VC is also interesting because it has the additional benefit of creating a connection with members.
How can you create that connection? And what outcomes does it produce?
Humble: At our core, we are still a fintech and member engagement is a very big part of who we are. We are not in the business of ‘moving fast and breaking things’, but members can find pensions a bit too difficult to engage with. It’s important for us to get people excited about their investments. And making people feel better about their pension increases financial wellbeing.
People are more likely to persevere with saving when they feel good about their investments and feel emotionally connected. We can remove some of the barriers – increasing so-called task persistence – by increasing the tangibility of investments. VC creates a connection between members and their investments as it can provide particularly interesting stories.
Venture Capital creates a connection between members and their investments as it can provide particularly interesting stories
Victoria Humble
We often tell members about the companies we invest in. For example, we can show them a map of our UK solar and windfarm investments. My favourite example is a sustainable pepper farm – members can buy the produce in a supermarket and eat the outcome of their savings!
Physical buildings can also really help. The lessons from Australia super schemes are very clear – they can often point to very tangible things like city redevelopment projects. As an industry we need to make pensions much more tangible – and private markets add tangibility.
How would you go about gaining exposure to VC?
Humble: We are in discussions with two potential VC managers, the British Business Bank and Future Planet Capital. We’re working towards investing with them, subject to due diligence and trustee approval.
A VC allocation would probably be within our 15% target because, as we’re growing quite fast, quite a lot of spare capacity will open up even when we’re increasing contributions towards existing investments.
How big would a DC scheme need to become before it could follow a similar strategy to Cushon?
Humble: We don’t think pension schemes need massive scale to be doing innovative, interesting and beneficial things. Smaller players can be nimbler and work with emerging fund managers or invest in newer things, which don’t need massive amounts of money straight away.
Are you concerned about potential illiquidity?
Humble: Not really. For master trusts, there are ongoing contributions. We would not be particularly troubled by a lack of liquidity as we are massively cash flow positive – and LTAFs typically have a liquidity buffer. I’m sure all master trusts are perfectly comfortable for at least the next 10 years – almost all are accumulating new clients and contributions.
Most very large single-employer DC schemes also have some private markets. But for them, the scheme’s longevity and liquidity are important questions, particularly if the sponsor intends to fold it into master trust at some point.
What is your view on the government’s attempts to channel money into UK infrastructure?
Humble: We are very supportive. It’s hugely beneficial, particularly for our younger members. What often matters to them is that their pension is working for them right now – not just in 40 years’ time. This means building infrastructure around them and investing in companies that add value to the economy. Investment returns come first and foremost, but this is not detrimental to financial returns, its additive.
Eversheds Sutherland did some work for our trustees on interpretations of fiduciary duty. The gist was that trustees should not just consider purely financial returns, but also the overall standard of living of members.