How the UK’s DC Master Trusts are reshaping their asset manager relations
DC Master Trusts are rapidly evolving from mere index investors to rapidly growing funds with diversified portfolios and an increasingly active approach towards stewardship and relationships with managers
Asset managers and asset owners share a complex yet consequential relationship. In the domain of net zero investing, even more so. At the base of their relationship is a principal-agent dynamic: asset managers are appointed to steer asset owners’ capital towards desired destinations. They are, therefore, agents of their principals’ capital.
The asset manager – asset owner dynamic is characterised by a central question at the heart of most principal-agent problems: do the incentives of the agent reflect the preferences of the principal? More importantly, how do principals respond if they do not?
Implementation statements and TCFD reports published by the UK’s largest Master Trusts contain detailed information on how these asset owners are reshaping and reviewing their asset manager relations.
These disclosures paint a picture of how the principal-agent dynamic has evolved in the recent past and where it is headed.
Stewardship
The principal-agent problem is most prominent within stewardship. Asset managers vote on behalf of several asset owners who invest in their funds. Both the principal and the agent have preferences when it comes to engaging with companies over corporate climate action.
Unsurprisingly then, some Master Trusts, choose to consult their managers in the months prior to the AGM season. Aegon Master Trust for instance, communicates the Trustee’s voting preferences on the key AGMs in the upcoming proxy season to asset managers. This “expression of wish” approach was piloted by the Trust in 2023.
At the end of the season, Trustees look back and assess the degree of voting alignment.
In the 2023-2024 scheme year, three managers were assessed by Aegon Master Trust – BlackRock (the default manager), HSBC Asset Management and Aegon Asset Management. “The Trustees found that HSBC and Aegon Asset Management voted in line with the Trustees’ preferences, in all instances where the manager held the relevant company. BlackRock’s voting behaviour diverged from the Trustees’ ‘expression of wish’ on company shareholder resolutions”, the Trust reveals in its TCFD report.
In only one instance, did BlackRock’s engagement strategy meet the Trustee’s expectations. Following this review, Aegon UK contributed to BlackRock’s new decarbonisation stewardship policy which the Trust’s TCFD report predicts will have “the potential to further align BlackRock’s voting with the Trustees’ expectations”.
More on this: NZI Defined Contribution Forum | 30 January | Stationer's Hall | London
Fidelity Master Trust which offers a FutureWise Equity Fund comprised of three BlackRock funds, also reported similar concerns. “BlackRock should provide a clearer link between stewardship priorities and how these are implemented through engagement with portfolio companies”, the Trust explains in its implementation report.
In an updated statement of investment principles published in early November, the Fidelity Master Trust reiterated that reviewing asset manager stewardship is aimed at ensuring that “they [asset managers] are acting in the best interests of the members”.
Others reported more positive results of asset manager stewardship reviews. In October 2024 Aviva Master Trust published an implementation statement which lists examples of asset manager engagement that align with the Trustee’s stewardship priorities. The list includes BlackRock’s engagement with Shell over biodiversity issues, Baillie Gifford’s engagement with BHP over scope 3 emissions and MFS Investment Management’s collective engagement with Rolls Royce over sustainable aviation fuels.
Smart Pension Master Trust also reported positive reviews. “Climate change is considered as part of our ongoing monitoring activities, including monitoring the voting and engagement activities from underlying fund managers. Over the Scheme year we have not identified any material concerns from underlying fund managers”, says Andrew Cheseldine, chair of the Trust’s board of trustees.
Asset allocation – the new frontiers
In addition to stewardship, a Trustee’s asset allocation preferences also shape asset manager reviews. Scottish Widows Master Trust aims to deploy £1 bn in climate solutions by 2025, a target the Trust has already surpassed, according to its latest TCFD report. The Trust also plans on investing between £20-£25 bn in ‘climate-aware’ strategies by 2025. These strategies are being developed in cooperation with the Trusts’ asset managers – BlackRock and Schroders.
“We’re working closely with our appointed investment managers BlackRock and Schroders to develop and refine a range of funds that have a bias towards investing in companies that are adapting their businesses to be less carbon-intensive and/or developing climate solutions", the Trust revealed in its TCFD report.
The future trajectory of a Master Trust’s capital allocation reflects the current search criteria for asset managers.
“Our latest iteration of our fund manager monitoring exercise included a question on biodiversity which allowed us to identify fund manager best practice and engage where relevant”, Aegon Master Trust disclosed in its TCFD report.
Other Master Trusts had similar stories to tell.
Smart Pension Master Trust’s objective of increasing exposure to biodiversity equities motivated an allocation to the AXA Biodiversity Fund. Aon Master Trust’s preference for expanded climate-based screening within its default option resulted in a new emerging market equity strategy. Nest Master Trust’s search for climate mitigation solutions led to a thematic equity mandate for Lombard Odier Investment Management in February 2024.
DC Master Trusts’ stewardship and capital allocation preferences are part of the agenda at Net Zero Investor’s Defined Contribution Forum in January 2025. It is hard to imagine asset manager relations not being part of the conversation.
