More than ten million people, 42 per cent of the workplace pension market, have been auto-enrolled since 20121 and master trusts play a role across the whole spectrum - from simple, cost-effective solutions to premium, customisable arrangements.
At the same time, pension schemes have had to implement new standards to protect members, while trustees are under increasing pressure to professionalise and report on the factors they take into consideration. For master trusts, tougher regulations focused on reducing risks are leading to consolidation.
All of this evolution gives pause to assess the UK retirement market and where it is headed. There are more than 200,000 defined contribution (DC) schemes in the UK.2 These are split between contract based, which gives a direct link between employee and provider, and trust based, where the employer plays a more prominent role via its appointed set of trustees.
As defined benefit schemes fade and DC becomes the sole receptacle for retirement saving, the appeal of master trusts is simple. They give employers access to a trust arrangement with one trustee board to oversee governance, lower operating costs through economies of scale and, in some cases, access to specialist investment teams. This appeal applies to smaller companies that simply do not want the administrative and governance burden, and to larger schemes seeking a sophisticated and large-scale solution.
Master trusts are now required to be authorised by The Pensions Regulator, so there is more transparency and a greater level of structure in the master industry. Master trusts will now be expected to have higher levels of capital backing, removing reservations around the robustness of their long-term business models. This means that the main trade-off for most employers is whether they want access to that simplicity and scale, and to what extent they’re willing to relinquish control over their own scheme.
“What a master trust does is take risk and potentially cost away from the employer, and delivers the scheme in a robust and scalable way,” says Alex Cave, who helps head up asset manager BlackRock’s DC business. “It’s arguably more sophisticated in structure than a single scheme, so there are benefits from both a member’s perspective, but also very specifically from a corporate perspective.”
Designing the right master trust
Employers looking at these developments can see the quality on offer has improved as barriers to entry increase. So what does an ideal master trust scheme design look like in practice?
Designing a robust master trust involves a number of steps but, at its heart, must be an appropriate default investment solution which will
help members achieve their retirement goals.
Good schemes will have a holistic approach to portfolio design, an efficient governance structure, engaging member communications and a cost-effective offering.
“We surveyed 1,000 scheme members in 2018 and the message from them was clear: they expect their employer or scheme to get good returns” says Mr Cave.
“With over 90 per cent of members typically in the default investment,1 this puts a particular onus on investment design to ensure their expectations and circumstances are taken into consideration.”
Ideally, a scheme will deliver investment profiles reflecting their members’ statuses at various stages of their life, typically known as a ‘glidepath’. As the Financial Conduct Authority’s Retirement Outcomes Review has just prescribed, schemes should have different ‘landing points’ depending on whether the member believes they will want to cash out of the pension, buy an annuity or stay invested to draw slowly from their pot.
To ensure an employer builds a robust and future-proofed investment solution, many master trusts are making use of the glidepath concept. This process usually sees a younger investor’s portfolio contain mainly equities and then gradually moves to a conservative portfolio, comprising predominantly fixed-income investments, as they get closer to their intended retirement date.
“It’s important to consider a holistic approach to portfolio construction, particularly around the creation of member-centric investments which takes into account the member’s age and circumstances,” says Mr Cave.
“When looking at the default scheme structure, it’s important not just to focus on cost and broad-based market exposure; there should be sophistication on the investment content,” he says. “From an independent master trust perspective, there isn’t necessarily the internal skillset of investment management, and they may
need to source that from an investment manager, but with an insurance or consultant master trust you would expect a significant level of that expertise.”
Companies with schemes ranging from a micro to medium size usually see a master trust as a particularly attractive proposition, due to the ability for the master trust to drive negotiations on fees and add to the sophistication of the investment product in the default construct.
“I don’t think master trusts are unattractive for large and mega schemes, as we have moved a number of schemes of this size to master trusts in the last 18 months,” says Mr Cave.
The subject of governance is less tangible than the more binary questions of investment, cost and even communication. Those are often easier to reflect on whether the employer’s existing scheme has the resources to conduct these activities at the desired level.
But governance is the driver of all scheme aspects and companies moving from a trust-based arrangement need to balance the benefits of scale offered by a master trust against the control they will potentially relinquish.
It involves deciding how best to measure whether the scheme’s investments are delivering against their objectives; whether they are providing value for money and that all investment considerations, including environmental, social and governance (ESG), have been taken into consideration.
“The concern from those firms would be, ‘If we put this into a master trust, do we end up with something off the shelf and do we lose the ability to tailor it specifically to our members?’ What we’ve seen is that master trusts absolutely have the capability to tailor those products for large schemes, removing this concern,” says Mr Cave.
While easing the governance duty of running a DC scheme is a key benefit for employers, members, too, can gain from this switch. Master trusts can invest at scale in communications platforms and drive engagement to increase contributions, and create better outcomes for members.
“It’s a major challenge for the retirement industry to help people meet their retirement goal, as people are not yet used to holding sole responsibility for their retirement future,” says Mr Cave. “Many people are clinging on to the notion of ‘my employer will take care of me’ and are not used to thinking about their retirement savings.
“As more people become solely dependent on their DC pots, it’s vital that they are made more aware of the choices and responsibilities in front of them.”
BlackRock’s 2018 DC Pulse Survey found that only 12 per cent of respondents know exactly how much is in their DC pot from their current employer, indicating members need to be given the right tools to be better informed of their progress.
The potential scale of master trusts means they may be able to fund a dedicated communications team. Master trusts have the ability to segment their member communications, too. For example, having different communication programmes for retail workers, engineers and dentists to reflect their different retirement targets.
“Although the underlying mechanism is the same, it’s not just one huge pool where every member gets the same user experience. There are a number of opportunities to tailor engagement with members on a granular level,” says Mr Cave.
“Good schemes engage with their members and speak to them on digital platforms, aimed at driving an increase in contributions.”
Growing role of ESG
There is a growing demand for master trusts to consider the ESG aspect of scheme investments. Members are growing more interested in where their money is being invested and if it’s being invested in a sustainable way. According to DC Pulse, seven in ten members would invest in an ESG fund, even if it had lower returns or
“Master trusts have a real opportunity to be trailblazers on ESG issues. We have a significant responsibility as an industry to manage environmental, social and governance issues, and master trusts have a chance to become advocates for good. This is what the best master trusts have done; they’ve in-built ESG into their default,” says Mr Cave.
The question of how best to incorporate ESG into a master trust is increasingly relevant as proposed regulations across the UK and European Union are set to more clearly define investor duties. Trustees will soon need to have some form of articulated strategy around ESG, with evidence of specific actions that have been made to meet ESG requirements.
“In the master trust structure, there is significant scope for BlackRock to offer guidance and support on selecting investment products to improve the quality of investment defaults,” says Mr Cave.
“We are uniquely experienced to help our clients, including master trusts, take a holistic view of their portfolios and what they’re trying to achieve. Often the solution is a blend of different investment strategies, which we optimise to be as cost efficient as possible.
“Ultimately, what we are looking to do is improve the member journey and find new ways to provide them with better security on their retirement dreams.”
For more information please visit www.blackrock.com/institutions/en-gb/solutions/defined-contribution
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BlackRock DC Pulse Survey conducted in association with research agency Illuminas in May-June 2018 among a nationally representative sample of 1,000 UK representatives aged 25-69 years old, earning £10,000 or more and who are contributing to a defined contribution workplace scheme. The results of this survey are provided for information purposes only.
1 The Pensions Regulator, 2018
² Broadridge DC Monitor 2017