Master trusts under the microscope
It is because of this huge shift that the Reward & Employee Benefits Association (REBA) has once again partnered with our friends at Corporate Adviser to offer this Master Trusts and GPP Defaults Report. Corporate Adviser is the leading publication for workplace financial services intermediaries and the employee benefits sector.
We believe that reward and benefits managers responsible for workplace pension schemes should be kept informed on how the rapidly evolving master trust area is changing. Most importantly, those responsible for selecting a pension provider need to be fully aware of how the choice of master trust could impact on savings outcomes for their employees.
This report analyses the decisions made by the 30 leading master trusts and contract-based workplace pension schemes such as group personal pensions (GPPs). The combined assets of the master trust and contract-based default funds in this report totalled over £89bn as at 31.12.19.
In order to interpret the relative performance of individual master trust and GPP default funds the Corporate Adviser team has created a benchmark called the Corporate Adviser Pensions Average (CAPA). The CAPA is the average (mean) return delivered by the 30 default funds in this report, which cover the great majority of investment strategies which determine the pension pots of employees in defined contribution pension plans.
Since the 2019 report all schemes have been required to go through The Pension Regulator’s authorisation process, giving schemes a new level of validation in the eyes of the market as well-run, properly-capitalised operations.
The regulator is also cranking up the pressure on single-employer trust-based schemes of all sizes, through new trustee obligations, charge reporting requirements and duties in relation to environmental, social and governance (ESG) investing, with a particular focus on climate change – adding even more reasons why employers might want to hand over the management of their scheme to a professional parent.
The steep growth of the successful master trusts will inevitably lead to the development of several mega providers. We estimate that in five years’ time there will be at least six master trust default funds with more than £10bn of assets, of which at least three will have assets in excess of £20bn, some considerably bigger than that.
Engaging with members at key moments in their savings journey is a crucial part of achieving good member outcomes and communications should be a top priority for employers, particularly in light of the current stock market turbulence.
With so many members not receiving financial advice it is the communications that schemes offer that are the key interface with the customer. While engagement with pensions has historically been low, advisers and providers report significantly increased engagement with pensions amongst the working population, particularly amongst younger employees. Engagement is also a big opportunity for providers – increasing individuals’ contributions is one of the most effective ways for them to grow assets.
Several providers have offered online pension forecasters and other tools for a number of years. Personalised video statements have been an innovation adopted by a number of providers in the last year or two. Smart technology, gamification, AI and data will all be key to increasing engagement with pensions, though providers’ ability to invest in and deliver these differs significantly. Online access to valuations is now virtually ubiquitous.
Auto-enrolment default funds have almost universally enjoyed extremely strong performance in the period running up to the end of 2019, benefiting from the longest bull run in history. However, from the start of 2020, the biggest market falls since the financial crisis have been testing their asset allocations to near destruction; the financial instability triggered by the Coronavirus pandemic has turned markets on their head.
The asset allocation tables on the provider pages at the back of this report show the extent to which different providers have endeavoured to improve their position on the risk/return efficient frontier by diversifying into a wider range of asset classes. It is in the coming weeks and months that we will see which strategies have weathered the storm well, and what members’ behavioural responses have been.
The big lesson for employers is that the pension provider it appointed has a significant impact on the ultimate retirement pot of each employee. There is a strong onus on those making pension provider appointments to keep informed, using independent sources with access to a wide range of data from across the pension provider market, such as is the case with the Corporate Adviser team.
Read the full Master Trusts and GPP Defaults Report.
The author is Debi O’Donovan, co-founder and director, Reward & Employee Benefits Association (REBA).
