From launching a sponsored LTAF to navigating fee caps and liquidity considerations, Scottish Widows is taking a cautious but deliberate approach to private markets in DC. Head of portfolio management Heather Coulson sets out the strategy.
Heather Coulson heads up the portfolio management team for customer funds at Scottish Widows, overseeing around £170 billion across workplace pensions, including its contract-based schemes and master trust, as well as direct-to-consumer and advised channels.
She spoke to PMP about why the firm has recently seeded its own LTAF, how private markets fit into DC, and the constraints providers still face.
Talk me through how Scottish Widows is investing in private markets.
Coulson: Private markets are still relatively new for the DC world, which is a key area of focus for us today. We’ve been very busy over the past year working on the Scottish Widows sponsored LTAF, while also considering how private markets might evolve across our broader propositions, including D2C and advised.
Mid last year we decided to launch our own LTAF rather than invest in those run by asset managers. To build a lifetime investment proposition that genuinely incorporates private markets, we felt it was important to appoint an independent authorised fund investment manager and specialist sub-fund managers.
The LTAF has two components: a growth sub-fund and a diversified credit sub-fund. These sit within the glidepath, supporting customers from accumulation through to decumulation. We’ve appointed Aberdeen to manage the growth sub-fund and BNP Paribas to manage diversified credit.
We were very clear that we didn’t want to be tied to a single private markets house and entirely dependent on their origination. An open-architecture approach gives us optionality and the ability to bring a broad suite of private market opportunities to our customers.
How will the growth and diversified credit mandates be managed in practice?
Coulson: Aberdeen is responsible for the overall growth mandate, investing across a range of private market asset classes including infrastructure, private equity, venture capital and some private debt. Liquidity is, of course, a critical consideration throughout.
BNP Paribas manages the diversified credit mandate, which spans direct lending, infrastructure debt, senior and junior strategies, risk-sharing investments, structured credit and, more opportunistically, commercial real estate.
How much exposure to private markets will members have?
Coulson: This is the first time our contract-based schemes will have access to private markets. We seeded the LTAF in early December, and it will be operational at the end of January.
We currently offer three lifetime investment propositions. Scottish Widows Lifetime Investment Core does not invest in private markets. At the end of January we’re launching Lifetime Investment Plus and Lifetime Investment Extra. Plus will have an allocation of around 10% to private markets, while Extra will be around 20%.
Scheme trustees or sponsors will select which option they want to offer members. The majority of our existing book is invested in Core, but schemes can transition to Plus or Extra if they want to introduce private market exposure.
For our own master trust, the decision will sit with its trustees. We’ve presented them with the propositions we’ve developed and their consultant is reviewing them. It’s an active discussion and a final decision will be made in January.
Why is Scottish Widows moving into private markets now?
Coulson: The market has been calling for this for some time. We believe long-term investment in private markets can enhance returns and improve diversification, which supports better risk management.
The UK has a significant retirement savings challenge. Recent research shows that almost 40% of people aged 25 to 65 are not on track to meet basic living needs in retirement. That’s a stark statistic, and we want to play our part in addressing it. Private markets aren’t a silver bullet – there are many other factors at play – but we do expect them to help.
Many master trusts are moving into private markets at the same time. Are there enough opportunities to absorb that capital?
Coulson: Globally, yes – there are ample opportunities. But we do need to be careful. There are many relatively new entrants, and manager selection is critical. Private markets have faced some challenges recently, which is partly why secondaries have grown in importance.
We’re conscious that we’re relatively new to this space, so partnering with the right managers and carrying out thorough due diligence is essential. This is even more so the case if one believes higher global macroeconomic volatility may be on the horizon. Ultimately it comes down to careful capital allocation and strong investment governance.
What about the UK specifically? The Mansion House Accord encourages schemes to invest at least 5% domestically – are there enough UK opportunities?
Coulson: While we’re not signatories to the Accord, we are very supportive of investing in the UK. As part of Lloyds Banking Group, we’re committed to helping Britain prosper. First and foremost, though, we have to deliver good outcomes for customers.
If two opportunities stack up comparably on a risk-return basis, then investing at home makes sense. Investment in domestic infrastructure, for example, can ultimately carry a dual benefit.
That said, track record matters. We’re seeing many new private market managers entering the UK, and while we’re keen to look broadly, we need to be confident we’re not taking undue risk. There may be sufficient opportunities, but there’s also a lot of capital chasing them, so we’ll continue to evaluate carefully.
Why did Scottish Widows sign the Mansion House Compact but not the Accord?
Coulson: We wanted to preserve our strategic asset allocation independence. Remaining unconstrained allows us to offer what we believe are the best investment opportunities at any given time.
We are supportive of UK investment and already do this in a number of ways. We’re also looking to be innovative in how we design and deliver products to customers, and flexibility is important for that.
Your upcoming panel at PMP’s Inside the Deal event in February will discuss where there is a funding gap in UK private markets. How do you see it?
Coulson: The US has a much deeper capital pool, largely because institutional investors there have been allocating to these strategies for longer. In the UK, there’s been frustration about the pace of pension fund investment, but practically this takes time.
The LTAF structure is still relatively new. Providers need to build internal capability, design propositions, secure regulatory approval and, crucially, bring customers with them. You can’t just flip a switch.
There are also structural challenges, particularly fee caps in contract-based schemes. Performance fees have to be included within those caps, which limits how much you can allocate to private markets. There’s a lot to navigate.
Do you see performance fees as necessary?
Coulson: There needs to be discipline around hurdle rates and fee structures, but the reality is that returns in private equity and venture capital are highly dispersed. To access the best managers, performance fees are often unavoidable.
Excluding them entirely would significantly constrain the opportunity set. Large-scale funds without performance fees that have consistently outperformed are hard to find. We’ve chosen to include them where appropriate, primarily in the growth sub-fund rather than in diversified credit.
How much discretion do managers have within the growth fund?
Coulson: Private markets require flexibility, particularly during the ramp-up phase. We’ve set reasonable ranges for sub-asset class exposure and expect to maintain close relationships with our managers, including monthly discussions on how allocations evolve.
We have clear expectations around asset allocation both during and after ramp-up, but we also want to empower our partners to make informed decisions.
How central is sustainability to the LTAF?
Coulson: Responsible investment is ‘fitted as standard’ across our propositions, and the LTAF is no exception. At a minimum, our exclusions apply, but we’re also looking for opportunities that support better long-term outcomes.
Ultimately, we have to deliver returns for customers, but we believe that can be done in a way that supports better infrastructure, lower emissions and improved quality of life.
Are you concerned about political risk around sustainability, particularly in long-dated assets?
Coulson: Not particularly. We’re focused on investment outcomes rather than political agendas. Responsible investment, for us, is about doing the right thing in a way that supports people and economies over the long term.
If an opportunity for example, supports better social outcomes, improved infrastructure or emissions reduction and makes sense financially, we can invest in.