How structural changes in UK asset management will impact the industry and economy

Well, thank you, Michael. I feel like I've wasted a huge amount of time writing a presentation, because I really should've put it into ChatGPT. As Michael alluded to, I used to work in asset management. I spent 25 years in asset management in fixed-income markets and asset allocation, most recently as Global Head of Asset Allocation at Columbia Threadneedle. More recently, over the past couple of years, I've been writing bits and pieces for the 'Financial Times', who were kind enough to make me a contributing editor last year. I do go down quite deep rabbit holes, but right now what I'm going to be talking about for the next maybe 30 minutes or so is going to be the future of the UK asset management industry, as I see it. Conscious that there are a lot of experts in this room who might have slightly different views. Please do chip in, think about whether this is - how this stacks up against your own expectations. There are a few things also that I'm not going to speak about in great depth, one of which is ESG. That can go down a huge rabbit hole by itself, although there will be aspects of it. I think it's quite hard to avoid thinking about UK asset management without understanding ESG. Second of which is regulation, although I do have a slide on regulation because, again, there can be a good hour or two regulation presentation. The third of which is AI, because frankly, I don't think I can top anything you've heard today. It's been absolutely fascinating. Also on the asset management AI side, when I speak to friends and colleagues across the industry, a lot of people are quite excited. A lot of people are thinking about investment. A lot of people are doing bits of work, but very few are able to point at anything today that's up and running. The future of investment management may well incorporate these aspects. But I think that's something I'm going to leave aside for now because I'm going to focus on the things I really know a lot more about. This gives a better sense as to where I'm going to go on the presentation, just to give you a guide. I'll be talking about: the nature of the industry; the policymaker objectives; the problems on the UK institutional side; on retail side; and how asset management firms might navigate some of these challenges. But first of all - so don't worry, this is just to give you some signposts to give you an expectation of where we're going - I'm going to just outline the industry. Now, as you all know, the UK is a huge centre of asset management. It's the second largest in the world. It is as important as the next three European markets combined, employing 46,000 people directly, another 80,000 indirectly - that's lawyers, accountants, investment bankers - and generates huge amounts of export revenue. I'm a big fan of the industry. I've got lots of friends in the industry. There are things which I think are very wrong in the industry - and I've written about those - but I think that we can have a great future of asset management. This is a very positive, upbeat aspect. Looking at the structure of the industry, I've just got this chart here which shows the top ten firms by UK assets under management, the largest of course being BlackRock. That is about £1.6 trillion of assets managed out of London. Of course there are £10 trillion odd assets managed globally, but £1.6 trillion out of London. The top ten firms are maybe sixty per cent of the industry in terms of assets under management. They face common challenges. They face the global bid for talent. It's a vastly profitable industry. For those of you that remember reading the FCA market study back in 2016 or so, it was really focussing on the fact that if you look across the whole set of industries across the economy, UK asset management stands out as being super-profitable - which was a problem that they had with this. There is this bid for talent. Second of all, there is a regulatory agenda for change, partly because of that. All these firms have got to look at this regulatory agenda - and we'll look in a minute. Third of all, there's this technology, third-party costs. The industry complains a lot about the fact that it has to pay index costs, it has to play Bloomberg costs, it's got the FCA to launch a market investigation about wholesale pricing. All of these are fairly common bits. But what I'm going to be interested in today is to look at the tectonic shifts on the client side. We'll have a tiny look at the regulatory bit and then we're going to dive down the whole client angle, or rather a view of the industry from the client side. The past ten years have been an absolute avalanche of regulatory change. You had the FCA market study which was implemented in 2018/2019. You had the MiFID II come through, which impacted asset managers just as much as it impacted the street. The senior management and certification regime, SMCR. LIBOR transition, Consumer Duty, the Sustainable Disclosure Regime. I think we're going to just about to start really enduring that, although lots within the industry will have felt that they might've had enough of it already. Then there are things like Pensions Dashboard. Now, to be fair, this came after a decade of tumultuous regulatory change. Back in 2012, you had the Retail Distribution Review. Now, I would think RDR is Exhibit A for what a regulator can do if they really set their mind to it in terms of transforming an industry. The effects of it were to halve the number of people employed as independent financial advisers. It completely transformed the way in which the asset management industry thought about selling retail funds. It was phenomenally, hugely impactful. Then before that, you had the foundation of the Pension Regulator, the foundation of the PPF in 2005 - which arguably is why we had LDI - but looking forward, the agenda seems a bit lighter. Chancellor Hunt seems actually pretty much the best friend to the City they could ask for. Practically, there's the Mansion House Compact. That's aiming to increase venture capital and growth equity. There's local authority pooling coming out of that as well, or at least consulting on how that can be better done. Ways to accelerate pension fund consolidation, which we're going to come back to. There are things like turning the PPF into a defined benefit super fund, which I'm happy to chat about in Q and A but probably a little bit niche. Increasing requirements on defined contribution schemes to force consolidation. The real the real underlying driver of all this is to create greater consolidation of the client side. That's why I'm pausing on this regulatory slide here, having said I'm not going to talk about regulation. It's because the regulatory agenda is about: let's look at the world from the perspective of a client mix. Let's look at the perspective from the client mix. This tree diagram, it took me a long time to get these data, so I hope you feast your eyes on it. It shows the £10.3 trillion UK asset management industry. About £8.3 billion - no, sorry, £8.8 billion - of that is Investment Association members. That's the trade body. You see this largest segment here - this dark blue one - that's UK institutional business. The red is international institutional business. Then the top right-hand, lighter-blue side is the retail or mutual fund business. Then you've got private clients, hedge funds, commercial real estate and the like which are outside of the IA. The largest part of UK institutional is pensions. Here we come to this foundational truth as to why we have an asset management sector in UK pretty much at all, or why it's so large. It's because of our asset-backed pension system. Understanding the fate of what happens to pensions is critical for the industry because it's the only reason we've got actually an industry base in the UK the size that it is. Let's go a little bit deeper into this section here, the UK institutional, and see how this splits down. Here we've got this split down a little bit further. You've got domestic third-party insurance here. This is all split by how it's managed at a mandate level in terms of equity mandates, fixed-income mandates, multi-asset mandates, LDI, cash and the like. Domestic third-party institutional, I used to manage quite a lot of this stuff. Think of things like unit-linked insurance product that was sold a lot in the '90s that probably your parents' generation might have for saving for their pension. There are also bits like general insurance. If you've got car insurance, that might be managed by an asset management somewhere in there. But a lot of it is in run-off rather than ongoing new business flow coming through. Then you've got this purple section over here, in-house insurance - which is terrific if you're an insurer with an asset management firm. That's not really going to go anywhere. Part of it is going to be in run-off because it's attached to life insurance and the old unit-linked business, but a lot of it is just keeping going. Then you've got sub-advisory down in the blue at the bottom. That's things like large wealth managers who are pooling IFAs more efficiently and doing model portfolios and then passing those mandates out. Local authority pensions in red. The UK local authority pension industry is about £475 billion, of which £270 billion is managed by UK firms. The 800-pound gorilla - here we go - corporate pensions, with LDI a large portion of that. Pensions are absolutely critical to understanding UK asset management - which is why many of you who work in asset management will know a lot about pensions. But thinking about the future of reform of these industries is going to be key. From a member perspective, if you're a member of a pension scheme you're probably going to be one of these people in blue. Those are defined contribution pension members, so money purchase, you put your money into a little pot and it hopefully grows and then you take it out at the end. But most of the assets are in that red section. That is defined benefit pensions, of which you can see about £1.4 trillion AUM sits in defined benefit pensions, with around about 600,000, 700,000 active members still there. A lot of deferred members, a lot of pension members. It's this defined benefit pension bit which has been… I've got the chart on the right-hand side showing the asset allocation. Very famously, it's shifted increasingly to bonds over time. This will not be news to you, with that little red bed at the bottom of UK equity going down to just over one per cent from close to sixty maybe twenty years ago. We'll return to the DC part because that's going to be important, but let's have a look at the DB. Now, from an asset management perspective, the fixed-income wipe-out of 2021 to 2023 was a major blow. Those of you within asset management will recall this very fondly - or not. The rise of yields, on that blue line, shows 270 years of gilt yields. The rise of yields was not historic but the pace of the rise was just astonishing. Finance folks will know: when you have very low yields, very high duration, capital loss becomes enormous. The drawdown shown on the right-hand side in terms of ten-year equivalent nominal drawdowns of around about a third, was pretty big. That will have been about the quantity at which that fixed-income business shrunk, perhaps a little bit greater than that because of the longer duration. Revenue fell. Fee base fell. It sounds like it's bad for pensions. This chart here shows what it did to pension assets. This is using PPF data. Defined benefit pension assets fell around £500 billion over that period. Some equities, some mostly fixed, £500 billion of pensions. To be clear, I wrote quite a lot of stuff around LDI about Truss and Kwarteng, mini-Budget. This has nothing to do with Truss and Kwarteng and mini-Budget. This is really all to do with the global rise in yields that came through. We can go down to Q and A, Truss and Kwarteng, mini-Budget. That was something very specific, but it sounds like it's pretty bad. Maybe not. I've chucked on here a blue line. This shows the present value of liabilities using what's called a Section 179 valuation from the PPF. The Section 179 valuation is the PPF's - so the Pension Protection Fund's - estimate as to how much you'd have to pay them to take off their specific liability to make good the member benefits of these schemes. Those aren't full benefits; they're 90 per cent of capped benefits, but you can see that that present value of liability fell by £1 trillion - which is pretty huge. Well, here we go: you can see present value of future liabilities defined by changes in yields. We're all bond literate. We understand that when yields go down, prices go up so when yields go up, the present value of future liabilities goes down. It's all a function of rising bond yields. Even bigger deal than that Section 179 liability collapse, was the buy-out liability collapse. Now, for the uninitiated, if a corporate sponsor of a defined benefit pension scheme has shut the scheme to new members - which almost all of them have - and wants to walk away from the business of running a pension fund and just focus on the business of making widgets or running a telecom company, or making steel or whatever it is, you can pay a buy-out pension provider a large amount of money in order to take the business away from you. How much the buy-out? The buy-out liability fell by about £1.3 trillion over that period. Having worked as an asset manager for many pension schemes over many, many years I've yet to come across a sponsor who actually likes being a sponsor of a defined benefit pension scheme. They like the fact that they've got some employees who've got defined benefit pensions. But they hate the idea that it's going to impact their day-to-day business. A lot of them - not all of them - a lot of them are looking to walk away if they can. You put this all together - the asset collapse, the buy-out liability, cratering - and you see for the first time in history, we have a situation where pension sponsors can walk away from the business of running pensions, and afford to pay annuity providers enough money that they can exit. Now, I was listening to a podcast the other day. Actually it was yesterday. A friend of mine, Soumaya Keynes - who's at the 'FT' - she asked another colleague, Martin Wolf, 'What's your most controversial belief that you really believe?' He came up with something really wacky. For me, I think my most controversial bond belief is that, while this line was meaningfully negative, that actually higher gilt yields represented a monetary easing, and lower gilt yields represented a monetary tightening. Every time that went down, you had UK sponsors shovelling large amounts of money towards their pension scheme. Stopping investing, stopping dividends, stopping all sorts of stuff in order to try and plug that hole. Every time bond yields fell, their incentive to do that increased. Now that that line is above the zero line, I think we're back into the orthodox way in which monetary policy is supposed to work, whereby lower bond yields are supposed to be an easing, and higher bond yields are a tightening. But there was a long period - a 20-year period - where I felt, and you may well disagree because most people do, that that relationship was flipped. For the first time, we've got an aggregate buy-out surplus for the industry and it's game over. I love this illustration that a colleague of mine at the 'FT' made, representing the pensions game. But this is amazing news for firms because on average, over the past 20 years or so - actually 15 years - firms have on average paid an additional £15 billion of special contributions each year to plug their pension holes. As soon as pension funds move to buy-out insurers, that just stops. Firms can invest, they can expand, they can return the money to shareholders. This is less good news for asset managers to whom the £15 billion was being allocated each year. This is quite a big deal. Will this trillion pounds move over straightaway? No. This chart here shows the value of risk transfer deals over the past ten years. The last line you can see, the last column, is highest; it's about £60 billion, but it's not £1 trillion. There are a few bottlenecks here, one of which is at the pension administrator level. It's things like checking spousal details are correct on 1990 IT systems. It's the sort of thing that you'd think is a great use case for AI, to be honest, but there we go. Then secondly, at the consultant level, engaging with covenant assessments. There aren't very many consultants who can do that. Then there's at the scheme asset level that I might want to just turn to now. But anyway, when I speak to management teams at bulk purchase annuity providers they say, 'Yes, we reckon £60 billion is about the pace that we can go at, but we've got maybe ten years of this.' So, a £600 billion transfer from asset managers away to come. Not trivial. Now, I said there was an asset impact. You might see I'm going into the weeds of pensions, but it's really in order to think about asset managers. But then there are some market things as well. This slide basically touches both on the asset management side and also on the market side, because there aren't very many bulk purchase annuity providers. They've got views as to how they invest their assets. This doughnut chart aggregates the asset allocation all together. They have gilts and cash. They've got corporate bonds. Most of those corporate bonds are actually international, in the States. Then there are all sorts of types of, basically, private credit. They love equity release mortgages, but there aren't enough, so there we go. That will shrink a lot through time. But stuff that goes in through the funnel has to really come in the form of gilts and cash, or some maybe high-grade corporate bonds if they accept them. What doesn't go through that funnel are equity holdings. Insurers have got no interest in that. They're not structured in a way that makes them have interest. Illiquids: there are some interesting bridging transactions that happen. The global private equity business is large enough that you can take secondaries coming off that without really making a huge dent on that market. But there are some things - like UK commercial real estate - which I think are maybe big market impact casualties from this funnel. Insurers have no interest in holding UK commercial real estate on their balance sheet as part of their portfolios. UK pension funds exposure to commercial real estate isn't huge. It's around five per cent of assets under management according to PFF. The UK commercial real estate isn't tiny. The numbers I show are a little bit out of date, but it's quite big. Put those things together because of the size of UK pensions; it's about 15 per cent of the invested market. Now, when I speak to very large pension schemes they tend to say, 'Yes, if we're looking at moving to buy-out and we've got, let's say, five per cent on commercial real estate, we do have to really slow down and think, do we want to take a large haircut on this in order to get it done?' The trustees tend to be pretty anti-that. They don't like the idea of selling off assets cheap in order to effect a transaction. But frankly, they are also able to fulfil their trustee duty to ensure that their member benefits are guaranteed. I've met more than one Trustee Board that have said, 'Yes, at the end of the day, we'll bite the bullet and take a 20 per cent discount to just get rid of it.' If it's five per cent of your portfolio, taking about a hundred basis points, and we're fifteen per cent overfunded, we get to go. That's the point of pensions. The point of pensions isn't to invest for the future according to the way in which we run defined benefits. Yes, it is in defined contribution. The point of benefits from the scheme's perspective is to ensure member pay-outs - and they've won, they've finished their game so they leave. That's one reasonable-sized implication on a relatively niche market. But it's probably worth thinking about maybe a larger market. What might this have impact for? By that, I mean the gilt market. For a number of years, you've had UK long-dated real yields that have been inexplicably low compared to international markets. The big reason for this that I've looked at, and when I've spoken to other folks - many agree - is because the UK gilt market has got a large body of captive buyers for long-duration assets. The Bank of England and pension funds are the two main buyers, with the Bank of England now selling. The pension funds are now the main buyers of gilts. I'm not saying that no one's going to buy the gilts. Of course, people will buy gilts, but it's just the shape of the curve. It could be interesting where we go through a process of discovery whereby, if pension funds are net sellers of gilts - and I think they're still net buyers because if you're not fully hedged as a pension fund and you want to go into buy-out, then you want to lock in your overfunding. You do that by acquiring more duration. We're still, I think, in this process of pension funds being net buyers on the defined benefit pension side. But once we go past that point, I think it's reasonable to ask: what sort of shape should that longer part of the curve be? Yes, it has steepened up but this is something which I know is occupying quite a lot of time from folks who I speak to who are mid-to-relatively senior across different arms of government, thinking about, where will demand be post-pension? The chart here actually, it's an illustration of peak LDI. It was from a very nice report that Hymans Robertson wrote back in 2018, when they were starting to think about this. But losing your largest buyer means we're more dependent on the kindness of strangers. That was what I was keen to say on defined benefit pension schemes on the corporate side. But let's just quickly look at the defined contribution bit. As we touched on, most assets today are in defined benefits, but most members are in defined contribution. Now, the chart I've got on the right-hand side here shows contributions. I'm going to fall off here. The dark blue and then the light blue, those are employer contributions. Then the reds and the grey - which you can't really see very much - those are employee contributions. Now, this tells you a couple of things. First of all, we - as in members - are lousy at saving for our pensions. We only do it when we're forced to. Pensions are really a thing that your employer does for you. The second thing is that we've just this last quarter, for the first time, had greater levels of contribution from defined contribution plans than from defined benefit plans. That handover was actually happening quite nicely. That's great. Given that defined contribution assets are in equity and growth assets predominantly, and given that the Mansion House Compact that Jeremy Hunt got the industry to sign up to, that puts illiquids into the picture as well. You'd say, 'Well, wow, this is actually quite an exciting future for the industry. It's a reinvigoration.' Caution against that is that when you speak to large managers, they don't have a great sense. When I was Head of Asset Allocation of Columbia Threadneedle, we had very little sense. All my compatriots at different places had very little sense as to how much pension money on the defined contribution side you're actually running. It could be sitting in your unit-linked product as part of someone's SIPP from third-party insurance. It could be in your third-party private wealth product that some large institutions handed to you as part of a mandate. It could be through your retail. Mostly, it's going to come through retail product mixed up with retail flows. You don't really know what's happening beneath the surface there, and what that means for active managers - or indeed passive managers. Then there's one other thing which is that, while money is money and it is coming into the industry as a whole overall, will it actually find its way to any independent managers? There's a thing which you may be a bit concerned about that it probably won't, and that's to do with master trusts. What is a master trust? It's beyond that. It's about 85 per cent of new defined contribution pension flows go to master trusts. A master trust is an investment vehicle that manages money, purchase, defined contribution pensions. It's got a Board of Trustees that are there to protect members' interests. They've sucked up the vast majority of auto-enrolment flows. Almost all of the flows that they suck in go into default funds. These are often lifecycle funds related to the age of members. It's usually as a rule of thumb, equities until you've got a spitting distance to state retirement age, and then it mixes to equities and bonds. Nest is a master trust. The People's Pension is another master trust. The concentration of master trusts is relatively high-ish. There are about 30 of them. There's absolute consensus in the industry, and also in government, that there'll probably be about ten in about a decade's time. Ten is probably around about the right number, give or take a couple. If you look at the Australian pension system of super funds, there are about ten of those. Three of these master trusts account for about half - well, a bit more than half - of all the asset increase over the past six months. That's Nest, The People's Pension and L&G. Some of those groups - like Nest - award third-party mandates to independent managers. Others don't. They do it internally or they allocate to passive. In short, active UK managers should probably not look to third-party DC master trusts to replace the lost DB business because they're likely to keep a lot of it themselves or put it passive. I hope that's not too depressing, because I'm going to move on to the bit more depressing part now. I've mentioned that a lot of the other stuff - the other DC - comes in the form of SIPP flows; self-invested pension flows or DC contract flows. That all, from an asset management perspective, looks like retail flows. Let's look at retail from here. Before I show you my first chart, I'm going to say in aggregate - spoiler alert - the industry hasn't served retail clients amazingly well. I'm not casting doubts on any individual managers - and I spent 25 years as a portfolio manager. I think I did pretty well for my clients. I'm sure that many of you will have done well for your clients as well. Active buy side in aggregate has not been able to support the fees that it carries from a purely risk-adjusted return perspective. Why do I say this. Well, I've got a chart here which shows the performance data of the larger sub-universe of European-domiciled active funds, which are global large cap equity funds. The green bits down here, these show the proportion that have beaten their passive counterparts. The red shows where they've underperformed their passive counterparts. The grey part shows where they've shut down or merged over time. It's about 1600 of them. As we extend the time horizon, you can see that actually the proportion that are able to outperform their passive counterparts, tends to shrink. Now, again, this isn't casting doubt on anyone's individual ability. It's just that the fees tend to be quite high. I'm actually a great believer in active management - probably because I was an active manager - but it was also informed by actually trying to do a bit of digging. Now, all of the stuff you read is like, 'Active management is rubbish and passive is fantastic, and active is a con.' But actually, all the academic studies I was able to look at, they all relate to mutual funds. They all relate to this stuff where there are relatively high fees. The two things that I found which don't really relate to my mutual funds - and I'm sure probably after, someone will say, 'Well, actually you've missed X, Y and Z - number 1 is by a bunch of people who some of you know, called CEM Benchmarking. This is a Canadian-based outfit. They work for pension funds, for end investors to provide them data on what their managers are doing. They're not a small outfit. They cover around $15 trillion of assets. That's about 15 per cent of global assets managed anywhere. The data go in through them. They feed back things like: how is your custodian performing in terms of cost and benefits? How is your internal staff measuring up in terms of the cost of all this? Can you find more efficient ways? I spoke to the research director, who was a physics PhD, who was horrifically cynical about asset management. He was like, 'You've started up this study to go through all of the data to basically present to clients that, "Listen, you ought to switch to passive."' He said no matter how he did the data, again and again and again it all comes down; active management has added value for clients, just not as much as we'd like as active managers. But after fees, there'd be a net-positive impact coming through and so I thought, well, that's encouraging. The second study which reinforced me of this view on active management positively, was the Competition Market Authority study into investment consultants that happened a couple of years ago. I'm going to bet that, although you're all in industry, you probably haven't waded through the hundreds of pages of PDFs that came through. But basically, the CMA came from the perspective - sorry, the FCA market study of investment consultants. They came really with the perspective that these guys are a bunch of con artists who are layering on costs that we can get rid of. They again came to the view that, having gone through actually the data, folks who employ these to use an active manager end up ahead. It's written up in an apologetic, quite mean-spirited way but it's unambiguous from the FCA's perspective on that side. Anyway, that's because I'm going to show you more depressing charts. That's me saying I really do think active management is something that adds value - but really only to institutional clients. On the retail side, not so much. You could say, well, to go from this green bit to the red bit, that's a basis point. But actually, it's not a basis point in terms of the way in which on this global large cap universe - and you can do this for any of the universe. Morningstar, they make the data available. It's quite large. I'm not trying to really cherry-pick here. I'm just trying to say that if you are a retail investor, it's possible that the kind of work that you need to do to choose your active manager, is maybe comparable to the kind of work that you might need to do to actually add value yourself - which is to say that the industry hasn't done it so well. Now, those two previous charts were really to help explain these beautiful charts here, which I've borrowed from McKinsey. What they show here is, on the left-hand side, active equity. On the right-hand side, active fixed income. Each of those 100 squares shows a different mix of percentile of performance and percentile of fees. The ones at the very top are the most expensive. The ones at the very bottom are the cheapest. The ones on the right-hand side are amazing performance. The ones on the left-hand side are pretty lousy performance. To get in inflow you need to be light blue. That's just crushingly hard. I know I'm now part of the mainstream media, and so may be responsible for this message that active management has been great for retail holders. But it's really coming through, making very hard-to-launch funds, very hard-to-grow funds. When we look at the data from the Investment Association, you can see that retail's really got it. Now, over the past ten years, cumulative net retail flows are negative on the active side, and large positive on the tracking side. What are the takeaways from that? It's not all doom and gloom. I think it's very important for the economy, the sector. There are challenges but there are also opportunities. Just quickly on the investment bit before we flick over to the industry. On the investment side, there could be amazing opportunities in commercial property. It's this question, there are going to be ten years of selling probably going to come. Whether the time to get that value on those distressed sales is now or later, I'm not sure. On the gilt side, I think there is going to be an interesting piece of work about estimating term premia post-pension. Then I didn't really go into it because it's hugely technical and a big rabbit hole, is that when bulk purchase annuity providers are going out to US credit, buying it up, what they do is they swap out all the duration and currency risk, doing fixed-for-floating swaps at both ends and then cross-currency swaps along the way. Because the direction is all one way, the pricing of that is starting to really get skewed. Again, management teams within bulk purchase annuity insurers, providers are like, 'Yes, this is going to be a thing for the next ten years.' On the asset management side, there are lots of things that you can do. Maybe I should start to move to Q and A rather than go through each of these in detail. But if I was running an asset management firm, I'd be thinking about private market product - which is something that the Treasury is desperate to bring forth. But there aren't very many opportunities to actually invest in it. The fact that British Patient Capital, which is a subsidiary of the British Business Bank, has got the largest single fund for investing in VC capital in this country, and is being talked about within Westminster and across the place as the likely candidate to have a conduit into this. I think that speaks to a failure of my industry for not having provided some other private sector alternative. It's not that folks are trying to go the government way. It's just everything else has been unavailable, so there's a social purpose to it as well, providing money for entrepreneurs and growth for the economy. On the left-hand side, if I was an asset management CEO I'd be thinking about, where do I buy and build some of these flows? There's going to be £60 billion a year going through bulk purchase annuity insurers, £25 billion a year going through DC master trusts. Wealth management used to be prohibitively expensive to buy; it really isn't anymore, but can you build it using digital wallets? Can you start to think about making a consumer's life much easier in something which features your product? Probably requiring fund tokenisation. Then on the public market product - which is where traditionally folks have, 'That's where we innovate' - most products I'd say… Actually, maybe it's not most but a large plurality, and perhaps going into a majority, are probably now going into this something that can't be compared so easily to a passive fund. You could read that on a cynical side, like, well, people don't want to be compared. But I sit on investment committees of charities and foundations and work with institutional investors and things. They're very keen to have some form of active management on the governance side. You can't satisfy your requirements that you might have, your objectives. That doesn't mean to say go and buy an exclusion fund, but buying some form of strategy which has got active engagement towards that client end, it feels like it's going to be - that proposition is important. Then cash management is so boring, so low fee, so dull - but actually there's a huge amount of money there. We know trillions and trillions of cash which is just very poorly-managed. There we are. In a nutshell, rising bond yields have basically solved the UK defined benefit pension sector problem. That solving of that problem now becomes a problem for the asset management industry. There are lots of flows coming on DC, but it's going to master trust. Do you buy and build or partner? How do you do that? Active retail is probably not the solution unless you build up some new active governance funds, in my view. But there could be other types of strategies there. There are lots of product holes that major firms can fill in things like VC and growth equity, cash management. I think maybe acquiring business channels would be something that I'd be looking to do if I was going to be a CEO. Anyway, I'm going to stop there and we can talk about any of these things. Or indeed we can go down any rabbit holes you want.

Thank you, Toby. As before, we can take questions either straight from the floor or through the app. There we go, the first one. Thank you.

Thank you very much for your presentation. Really great to hear from you. Can I ask: why do you put target volatility fund as one of your opportunities? Secondly, can you go into a rabbit hole of decumulation, if you can, please?

I put target volatility simply because it's very hard - sorry. It's not impossible, but it's much harder to build a passive compelling story for a target volatility fund. Whereas I think that a lot of investors seek something which fuels a certain bumpiness. You can put together a passive strategy. If you think about like classic 60/40, that in some way is semi-target volatility, although it's backwards-looking insofar as it's looking in the efficient frontier and deciding that a certain location is going to be fine. But it's really that: when I look across the industry and see where folks who are launching funds that don't have a market benchmark, that includes all the target volatility funds. I've seen a number of launches over the past year on that side. I just put it in that category of things where you could do that in a way which might provide client solutions. Then decumulation, so it's not something that I am actually that brilliant on because what I've tried to do was educate myself on ways in which different decumulation strategies occurred in other countries. I found that pretty much every country has got a decumulation strategy that they're unhappy with, think is broken and want changed. It's for that reason I was looking to cheat; I was looking to go, 'Right, X, Y, Z has solved it, let's think about how that might apply to the UK system.' But the UK system, I don't think, has got any great models right now. There are some people who are thinking about this, some very interesting stuff being thought about it, but it's not something I think I've got a great answer for. Sorry.

Thank you. Thanks for a great talk. I was wondering, do you think there is an opportunity in tokenization of private assets for DC schemes now that - especially if DB schemes are selling out of private assets like private credit and commercial real estate?

Yes, there's a certain amount of chat on tokenization of private assets. I'm more like the person on the Clapham omnibus on this insofar as I can see that it can happen. But I slightly wonder, is it about lowering the cost to making it happen? Investment trusts are something that I know a certain amount of folks in the DC world are talking about. I was at a conference last week where there was a lot of chat about whether regulation can be changed and how it can be changed so that private assets which can be bought by investment trusts or built into investment trusts, those investment trusts, their management fees aren't recorded in the same way - which is a big barrier to buying them in DC products from a charge cap perspective. It sounds as though there are enough legislators in both the Lords and the Commons who want to change things so that investment trusts can solve this. I know that's not tokenization but I'm still thinking about investment trusts. We're trying to do the same thing, in many ways, for DC schemes. I guess if you start to, say, tokenise a particular building and then whack that into a self-invested pension programme or something, that would just be making your own investment trust in a much smaller basis. I don't know how you'd do the valuations, but I guess that that's something that you'd be looking at on the tokenization side. I was thinking on tokenization more in terms of, we have this idea of asset managers do this thing and wealth managers do that thing, and your bank does this over here. I was thinking more in terms of the way in which, if you tokenised funds and made it very much easier to do, basically, instant settlement in very small increments that you could carry around in a single digital wallet your CBDCs - which are coming down the line - shift cash into fixed-income products, well, direct instruments or in terms of products, just in a much more granular, quick and easy digital way rather than something on the private asset side. But I can see that it can extend to that as well.

Of course, on our final panel of the day, we've got the CEO of Revolut. Interested to see how he answers that question. James, sorry.

Thank you very much. A couple of questions on master trusts, if that's okay. Firstly, there's a certain amount of evidence from Australia and more mature trust-based DC markets that as pot sizes grow and become more significant, people move away from default funds into more use of the open architecture platforms. Is that something you see happening in the UK potentially in future? If so, what would the implications of that be? Secondly, do you anticipate any particular policy or regulatory response to concentration in the number of master trust providers?

I'm going to go to the second one first because I think it's easier. It's that there seems to be a very, very active focus to reduce the number of master trusts that I see. When I speak to folks in the master trust side, they are completely aligned with: the government wants to increase compliance costs specifically in order to reduce the number of us from 30 to 12. We'll either do this by buying each other, or just some of us failing. The folks I speak to tend to be the folks who reckon they're going to be winners - and they've got good reasons why they will be. I don't think there's any concern that ten is going to be too few. I think three would be too few, but ten I think is the magic number that everything is aligned towards. In terms of the default fund side, it's interesting. When I look at the Australian system, I see there's a huge distribution in pot size. But the thing that skews it and probably doesn't give me the sight that you've looked at it, is that most of the very large schemes, they're all on that private super, my super side where you can kind of do what you like. You can go out and take out massive loans and then buy a bunch of houses or firms or whatever. That's not something which is quite so easy in the UK system. But I also see in the Australian system you do have a sort of competition on performance. I would've thought that people would start to think about moving away from defaults. But the defaults for the pre-retirement phase, I'm not sure they've served people particularly badly. Basically, if you're young-ish you just go into equity. We've had a huge equity bull market. Yes, the thing to watch, definitely.

Thank you very much.

I have one last question on here, if there isn't one from the floor. Let me just take this. You mentioned that Jeremy Hunt had been more friendly in his regulation. I guess if the polls are to be believed, he may not be the next Chancellor. Any thoughts on how the regulatory point that you made to the UK asset management industry, whether that will change under the new government?

From everything that I understand, Rachel Reeves is pretty much on the same page with pretty much everything that Jeremy Hunt has gone through. That's not just reading the papers, but in terms of speaking to people. They've really not sought to make any kind of political difference about these approaches. In terms of what I mean by that, in terms of consolidation, increasing the amounts of assets that are able to be made - or, sorry, removing barriers that would stop scale investment in the UK, which is different. There's a huge amount of nervousness about, do we direct assets - which people are very cross about - or do we remove barriers that are stopping things happening? As an example, UK infrastructure investment, the government doesn't have any money. We need a lot of investment, large pension pots. What do we do about it? Jeremy Hunt has talked about more local authority pension pooling. Now, think about: there are 86 local authority pension administrative authorities in the UK - well, sorry, in England and Wales, and there's a bunch in Scotland as well. They each have got different layers of governance in terms of investment committee and oversight and these sorts of things. Then they need to be attached to particular pools. They don't need to actually pool their assets; they just need to be attached to pools. Some haven't pooled their assets at all, and some have pooled pretty much all of their assets. When they've pooled their assets, that means different things in different places. For some, it basically means they've joined local authority Hargreaves Lansdown. There's a fun supermarket that they can go and buy things from and do things with. But everything needs to be set up for the local authority administering authorities to be able to go in and out of different pools. Now, that doesn't help you very much if you want to say, 'How do we guarantee there's a… We've got this £4 billion infrastructure opportunity, or set of opportunities, which are really compelling - but they're very illiquid.' Now, no individual scheme has actually got principal power to do that because none of them are big enough. Having them all members of this Hargreaves Lansdown doesn't help you with that issue because they can all still move in and out.

Move one on top.

Yes, so there are thoughts about how to deal with that which would deliver greater levels of consolidation. There's a view that they ought to - that there are far too many defined benefit pension schemes - 5200, still - and that the very small ones that would like to buy out, can't, even though they're massively overfunded because there's a one-off cost of buying out. That destroys the economics of it. There are things like, how do we remove that? But I think Jeremy Hunt and Rachel Reeves are generally pretty aligned on all these things, but with maybe a little bit of nuances to: how do you remove barriers which achieve essentially the same ends?

As a provocative and, as we've seen, incisive financial journalist - we've got two minutes for this - is there anything you've seen so far in the UK election rhetoric that you think you should be writing about from a financial markets perspective? Open question. There are no journalists in the room except you.

Well, I had to take myself off for five minutes earlier because there was something that 'Reform' have put out over the weekend, which is there is a greater excitement about this whole remuneration of bank reserves right now. These are central bank reserves. 'Reform' put out a plan saying that they thought there should be £35 billion of gains to be had by stopping remuneration on the commercial bank reserves at the central bank. Chris Giles last week came out and said, 'Well, there should be tiered reserves in order to get some fiscal gain.' Other people have been saying that as well. My colleague had a chat with Richard Tice while we were over there. He said actually 'Reform's' plan was to swap the entire asset purchase fund holding from where it is right now into new Corona bonds with a 75-year life, and stop paying interest on any reserves. That, as far as I can work out, stops the Bank of England having any monetary control. You either change price or you change quantity of reserves. It means that the bank can say, 'Oh, we're going to increase rates to 5.5 per cent,' and still they're at zero because you've lost monetary control. I think that's an interesting… It's maybe a little bit niche but I think this remuneration of reserves is actually maybe going to break through into the mainstream conversation. People will have to defend: why should the bank pay interest on reserves now? I think that's interesting. Also insofar as 'Reform' is fighting for the battle of the right-wing party post-election, that's what I see the entire election from their perspective is about, they could win that battle. The right-wing party in this country is the traditional custodian of government. It has been for the past 100-odd years and so the inheritor of whatever battle is going to be a very, very serious bunch of people that we need to take seriously.

Well, thank you. Unfortunately, as we can see from the flashing red light, we are out of time. Toby, we promised you a dive into the rabbit hole of the future of the UK and asset management industry. Thank you so much. That was great.