TPT builds scale one block at a time

CEO and head of investment management tell PMP how the scheme consolidator uses its building block strategy to achieve economies of scale across multiple types of pension proposition

TPT Retirement Solutions has grown from being the in-house manager of a defined benefit (DB) pension scheme to becoming a full-service pension solutions business for the wider industry. 

It positions itself as a pension scheme consolidator, providing employers with DB and defined contribution (DC) workplace pension master trusts and will add collective defined contribution (CDC) when the policy framework is finalised. It also provides standalone fiduciary management as well as administration, actuarial, covenant, legal and secretarial support to DB schemes.

“We’re trying to bring economies of scale to any solution for employers and members,” says David Lane, CEO of TPT. “We’re agnostic as to what an employer is trying to achieve or how it chooses to deliver it.”

Employers planning the endgame for their DB schemes can opt to run-on within a master trust and have the added ability to move to buyout if the endgame objective changes. Schemes entering TPT’s master trust give up independent trusteeship and become a new section, which then allocates across its pooled invest funds.

“Our primary objective across all our offerings is to promote consolidation, but we keep each scheme separate in a legally ringfenced section,” adds Peter Smith,head of TPT Investment Management.

The closest alternative to a master trust is a superfund, which is structurally similar but involves severing the employer covenant. “A superfund isn’t currently in our offering,” says Lane. “But we’re looking very closely at whether to extend our proposition offering to include a solution.”

Conversely, if an employer wants to retain a greater connection with its scheme it can opt for TPT’s fiduciary management service. This keeps the scheme and trustee intact while TPT runs its investment strategy.

In practice, whichever option is selected, TPT invests in a very similar way. It operates a building block model, with a series of internal funds that can be combined in a variety of ways to suit DB, DC and eventually CDC strategies. Overall, approximately one-third of its growth portfolio is in private markets.

TPT’s investment capability is the core of its business. Says Lane: “We leverage our fiduciary management service to manage assets across all types of proposition. The benefits of consolidation within a single organisation come from economies of scale in services, governance and asset management.”

Smith notes the industry thinks about DB, DC, CDC and superfunds as entirely different propositions – but this is not necessarily helpful. “Ultimately, they don’t need to be thought of as separate. If an investment strategy is underpinned by scale, we should think about all assets across all propositions as a single pot. Propositions overlap so we can generate scale within building blocks,” he says.

“When we designed the building blocks, we kept an eye on how we expected the pensions landscape to evolve over the next few years. If we can scale our significant DB investment in UK private market assets across DC and later CDC, with each feeding into the asset pools, it will bring down costs for everybody.”

Building private markets

Coming out of the Global Financial Crisis (GFC) in 2009-10, TPT concluded its DB portfolio was over-exposed to domestic equities and bonds. “We started to take diversification more seriously and thought about how we can diversify away from public markets,” says Smith. “There was significant home bias and that fuelled our desire to diversify more broadly and explore the role private markets could play.”

It already had an allocation to UK unlisted property and started to invest in unlisted infrastructure in June 2011. The post-GFC disintermediation of banks led it to enter private credit in September 2016.

In April 2024 it launched a Real Assets Fund, predominantly in unlisted global infrastructure, and Secure Income Fund. which holds a range of IG debt including infra debt, private placement commercial debt and real estate lending as well as long lease property. Two months later, it launched the Private Credit Fund, which holds credit instruments including direct lending, risk sharing and opportunistic credit.

Carne Global Fund Managers UK is the alternative investment fund manager (AIFM) for all its private markets funds. “Security selection is managed externally on a day-to-day basis,” saysSmith. “Our focus is on asset allocation, partnering with managers to implement our strategy and developing solutions for us.”

On accepting a new client scheme, it first sells all liquid assets and then considers its options for any private market assets. “We’ve got options, depending on whether we like the asset and any potential haircut a secondary market sale would require,” he says.

If TPT does not want to keep the asset and there is a viable secondary market, it sells. If it likes it or a sale is not possible, it can keep it within the new section. “We can substitute it into our model portfolio, so we don’t double the section’s exposure. We then run it down over time and invest in our preferred solution,” says Smith.

Alternatively, it could absorb it into one of its funds. “Our building blocks provide the flexibility to incorporate legacy assets into our model portfolio,” he says. “We can take it off the scheme’s hands and put it into a fund if it meets our criteria. All members then gain exposure to a more diversified pool.”

Ownership advantage

The master trust portfolio is the bedrock of TPT’s business model. It seeded the new investment funds with capital from its portfolio.

“The real assets, secure income and private credit funds all took assets in specie from the master trust to create diversified portfolios at scale. We then consolidated other schemes into our funds. Whether within our master trust or on the fiduciary management side, together they generate asset scale,” says Smith.

“[We’ve become] the single best place to consolidate. One of the best ways to reduce fees is building a bigger asset base. Consolidating different clients within these funds ultimately benefits everyone.”

Over the last couple of years, TPT has combined all its capabilities into three offerings, a master trust consolidation model for schemes that want to move all services into a single solution, DB connect which allows the trustee to retain control of the scheme and use TPT for the provision of all its services, and standalone fiduciary management. “Our first [external] client is in the process of onboarding into our DB connect offering,” says Lane.We will bring their assets into the building blocks alongside those of our master trust.”

Its “fairly-well developed” CDC offering will also invest in the same funds, says Smith. “We have built a platform that can be utilised across different propositions. Every benefit structure has its own liquidity and fees considerations. But ultimately, many commonalities and benefits are shared across UK pension schemes. Our first standalone trustee scheme is coming into those funds imminently.”

DC master trust

TPT launched its DC master trust exclusively for its DB clients in 2011, ahead of auto-enrolment, but has since expanded its offering to other employers. “We are in the mid-market group with Smart, SEI and Cushon – we broadly share similar client size and profile,” says Lane.

The DC proposition is managed by AllianceBernstein, which determines its allocations to private markets. “We were the first in the auto-enrolment space with target date funds (TDFs),” says Lane.“For a while that was a differentiator, but more are moving from lifestyle funds towards this structure.”

A more recent differentiator arrived with the launch of its at-retirement decumulation solution in June this year. “The default member pathway converts DC pots into an income until the member is 95 years old. The default is unique, but members still have other options.”

The very long decumulation pathway allows exposure to private markets much further down the glidepath. “It has a higher allocation to growth at-retirement than other schemes,” says Lane. “There is exposure to growth well beyond retirement – and therefore to private markets.”

The largest exposure will be to private credit assets, but the balance of strategies changes during the glidepath.

“It’s analogous to DB,” says Smith. “Young members will be in direct lending and commercial real estate lending, with exposures more junior in the capital structure and targeting a higher return. We convert the pot into income during the retirement phase, with exposures moving to more senior positions in the capital structure.”

The government has made it clear it wants DC master trusts to scale to £25 billion, as it considers this necessary to invest in so-called productive assets. The TPT DC master trust has c.£4 billion AuM and Lane can “certainly see” £10 billion by 2030 and £25 billion by 2035. “The size of the own-trust market means there’s plenty of potential new business. Combined with our flow of contributions, we certainly see a route to £10 billion.”

TPT’s ownership structure and sister DB master trust anyway means it has a total asset base exceeding £12 billion. “We already consider ourselves as a scale provider, just not narrowly in DC,” he says.

Smith adds: “We already benefit from scale through the DB side, including making co-investments to bring down fees. We are already at a scale where we see efficiencies.”

It also has the option of building scale through acquisitions.“It comes down to price and opportunity,” says Lane. “It’s something we would certainly look at if opportunity presented itself and it made commercial sense.”

Lane notes that economies of scale are not a direct function of AuM: “Like for like, fees are likely reduce as scale increases. But it’s hard to know where economies run out, with different geographies, opportunities, timescales and liquidity premiums to consider,” he says.

Smith adds that increasing scale has an impact on the desirability of certain asset classes. “For example, with £8 billion AuM, you can allocate relatively small amounts to niche capacity-constrained opportunities, while other opportunities can be too big,” he says. “With larger AuM, you can make large co-investments with cheaper fees, but niche opportunities are likely too small to make a meaningful impact.”

CDC launch

The regulatory framework for multi-employer CDC is expected early next year, as part of the Pensions Bill, and TPT plans to launch a solution shortly afterwards.

 “We intend to launch the first multi-employer CDC scheme,” says Lane. “We’ve had sufficient encouragement to convince us there is sufficient demand. We will launch as soon as the framework is available for us to authorise the scheme.”

“CDC is more like DC than DB from a fees perspective, as it operates under the charge cap regime. It’s effectively a growth portfolio of a DC scheme, albeit with some overlaid DB considerations. It fits nicely with our building blocks,” says Smith. “While CDC shares fees and value considerations with DC, it is also similar to an open DB scheme. CDC has a very long-term horizon and will target something like CPI + 4%.”

Smith adds that private markets will “definitely” be involved in its CDC solution. “One unique aspect of our CDC setup will be that, using our existing building block model, we will be able to offer a fully diversified portfolio, with private credit and infrastructure assets, from day one.”

Key facts

• Total DB AuM: £6.5 billion
• Total DC AuM: £4 billion
• Private markets allocation: c.30% of DB AuM (£2 billion), first allocation within DC expected before year end
• First allocation: 2011
• Private market capabilities: Internal asset allocators, fiduciary management business and a partnership with Carne Global Fund Management UK
• Current private markets: UK unlisted property, global unlisted infrastructure, and global private credit across various strategies and credit quality