Smart Pension CIO on investing £550m in split voting and branching out to climate solutions

UK master trust Smart Pension has announced a £550 million seed investment in a new low carbon stewardship fund today, offering access to split voting for 20% of its default fund assets, which are held in pooled funds.

The AMX-DWS Global Low Carbon Stewardship Fund is a partnership between the Carne platform, AMX, asset manager DWS, stewardship provider Minerva Analytics and index provider Solactive and has been included in Smart Pension’s default fund range in order to meet the pension providers’ 2040 net zero target, as CIO Paul Bucksey explains to Net Zero Investor.

It is another indication of the rising demand for stewardship options in in pooled funds among UK institutional investors.

Earlier this week, the London Borough of Camden Pension Fund had adopted pass through voting, a deal made possible through a collaboration between Legal and General Investment Management and UK fintech Tumelo.

Other UK master trusts providers, including Scottish Widows, have actively embraced BlackRock’s voting choice option.

75% carbon cut by 2030

For Smart Pension, reducing the fund’s carbon footprint at a faster rate has been a key factor behind the decision to adopt split voting for some of its default assets.

The master trust has seen its assets grow from £2.5 billion to just over £4 billion over the past year, in large part due to its acquisition of Evolve Pensions earlier this year.

But despite the rapid growth in assets, it has not scaled back on its net zero ambitions. On top of its existing net zero by 2040 target, the master trust now also aims for a 75% reduction of its carbon footprint by the end of the decade, Bucksey says.

In the past, Smart Pension had found its net zero ambitions restricted by the fact that many asset managers had less ambitious targets in place.

“We use pooled funds and that has meant that we didn’t hold voting rights. What you can do is express your voting preferences to fund managers so you can managers to account in terms of their voting record but that is a little bit different to being able to take a more active role” Bucksey emphasised.

He also hinted that the master trust’s use of split voting could potentially extend beyond its investments in the DWS fund.

“We are always keen to find out whether companies offer split voting capabilities," he continued.

"Clearly, at the moment, not very many do. But part of our overall strategy is to see exactly how far we can push this investing in pooled funds as an asset owner."

Another driver for Smart Pension’s net zero focus is the feedback it is getting from members.

“We survey our members quite regularly, we tend to have a younger demographic and they are potentially more interested in climate change than the average UK population” Bucksey said.

Having said that, Smart Pension offers members a choice between three growth funds that are price differentiated with the most impact-focused funds coming at a slightly higher price. All of the growth funds are at least Article 8 funds.

Unlike some of its master trust peers, Smart Pension does not have an in-house responsible investment team. But Bucksey argued that the master trust’s tech focus should help ease the implementation.

“We have an in-house team that looks at investments in the fund but we also look very closely with a number of advisors to carry out effective due diligence regarding all aspects of how funds are being run, including voting records, voting intentions and alignment with our principles of carbon reduction and our deforestation commitment," he explained.

"One of the key advantages that we have is that by being very tech-enabled, we can be very agile in making changes to our portfolio, it is much easier for us to make those changes than for some other master trusts."

Mansion House targets

While the adoption of split voting marks a potential step forward in reducing the carbon footprint of Smart Pension’s listed assets, a possible next step would be the adoption of private market investments in climate solutions.

Smart Pension, alongside eight other DC master trust providers, has signed the UK government’s mansion house compact, committing 5% of its default assets to private market investments. Will this include investments in climate solutions?

Bucksey is cautiously optimistic, despite the cost pressures for UK master trusts.

According to UK regulations for the DC market, providers face a charge cap on fees and are required to invest in assets that can be priced daily.

More importantly in the rapidly evolving auto enrolment market, master trust providers are also competing against each other on price.

In the past, this has lead to DC master trusts being almost exclusively invested in cheap, index-based strategies investing in public markets. But this could now change, Bucksey believes.

“While we are conscious of the cost pressures that exist in DC, we are exploring ways that we can invest or allocate some of our funds in renewable infrastructure, ideally without putting out AMC [annual management charge] up. We are talking to a number of fund partners about what that might look like."

Bucksey concluded by saying that "allocating to alternatives is a good thing, we are already invested private credit but getting into green infrastructure and a mixture of private and public companies is a logical next step for us within the next 12 to 18 months if we can find the budget to do that."

Paul Bucksey will be speaker at Net Zero Investor's Annual Conference on Monday, the 11th of December. More information can be found here.