Martyn James, director of investment at Now Pensions, explains how the £7.1bn master trust is allocating to affordable and social housing as part of its private markets strategy. Now Pensions looks after the pension savings of millions of members across the UK, managing over £7bn of those savings.
The members tend to have relatively small pot sizes on average, and consequently the state pension makes up a significant proportion of their income in retirement. Membership spans the whole of the UK, with a substantial number on lower incomes or working part-time.
Investing in UK Private Markets
When investing in UK private markets, Now Pensions seeks to make investments in assets that are tangible and relevant to members in communities across the country and have a real-world social outcome, as long as the financial return is expected to be good. They focus on investments that benefit the members and the community.
The Mansion House Accord has set a clear direction for DC schemes investing in private markets. Now Pensions has signed up to allocate at least 10% of assets to private markets in its default, with at least 5% invested in the UK. The company is committed to meeting this target.
Now Pensions expects to reach around 5% in private markets by mid-2027 and is confident the pathway to 10% will be achieved comfortably ahead of 2030. The opportunities need to stack up against global counterparts on a risk-reward basis, and strong financial outcomes for members remain the priority. It will be a gradual process.
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Social and Affordable Housing
One of the early UK allocations Now Pensions has made is to social and affordable housing. The trustees’ investment philosophy is built around three objectives: risk, return, and real-world impact. Private markets are a natural fit for the first two, and when the investment manager Cardano identified an opportunity to invest in UK affordable housing, it was clear the asset class could deliver on all three. This investment aligns with the company’s goals.
Affordable housing has a tangible impact on people’s lives, and the trustees felt that would genuinely resonate with the membership – many of whom are on lower or moderate incomes and could be directly affected by housing affordability and the housing crisis. The investment is expected to have a positive effect.
The social purpose was also key. From a financial perspective, the income profile and in particular the inflation linkage were compelling for the growth portfolio, which targets CPI plus 3.5% to 4%, gross of fees. This investment is a good fit for the portfolio.
Illiquidity is an inherent feature of private markets, and the trustees have undertaken analysis to ensure the scheme can comfortably accommodate it. The scheme is strongly cash flow positive with relatively limited outflows, providing a solid foundation for less liquid investments. This analysis gives them confidence in their investment decisions.
Investment Process
Manager selection is delegated to the investment manager, which undertook a thorough market review of available affordable housing funds to identify a suitable partner. The assessment covered all the expected areas: the strength and experience of the management team, how investment opportunities are sourced and executed, portfolio construction, and the robustness of the risk management framework. The manager’s expertise is essential in this process.
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Given the nature of the asset class, particular emphasis was placed on reputational risk – specifically the responsibilities associated with being a landlord, and how those risks are managed in practice. There was also careful scrutiny of how impact is defined, measured, and reported, to ensure the investment genuinely delivers the intended social outcomes alongside the required financial returns. This scrutiny is key to the investment’s success.
Having a social impact specialist such as Better Society Capital as a co-investor added to the confidence in the opportunity. BSC was a natural partner when Cardano was first doing the research into UK affordable housing, and it helped facilitate introductions to several managers on the long list. This partnership has been beneficial.
Now Pensions is targeting around 7% net of fees for affordable housing over the long term, which stacks up well against many traditional assets in the portfolio – including listed equities over time – particularly on a risk-adjusted basis. The trustees have agreed to invest in a bespoke long-term asset fund (LTAF) alongside the Mercer Master Trust, combining the scale of both organisations to build a high-quality, growth-orientated private markets portfolio anchored in strong risk and return characteristics. This investment strategy is expected to yield positive results.
Every decision is driven by the goal of delivering the best outcomes for the members financially and, where possible, in the real world. This approach will help Now Pensions make a positive impact on its members’ lives while generating sustainable investment returns. The company’s focus is on creating value for its members.
Now Pensions’ investment in auto-enrolment reforms is also expected to have a significant impact on its members. The company is committed to handling the complexities of these reforms to ensure the best possible outcomes for its members.
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