Making the most of master trusts

The rapid growth of DC master trusts in recent years has considerably impacted how they operate. Regulation has also played an important role and, with a general election due no later than December 2024, pensions policy may be about to become more politicised.

At the PLSA’s Master Trust Forum held on 19 September in London, our members discussed the many issues facing the sector and how they plan to tackle them.

Issues facing the industry

One of the biggest issues facing the pension industry – and generating a lot of discussion at the event – was the development and expansion of collective defined contribution (CDC). Other master trusts spoke of how the ongoing consolidation of smaller DC and DB schemes will likely drive further growth of the sector. In addition, employers and trustees are increasingly taking note of their considerable advantages master trusts offer, including greater regulatory support and investment expertise.

Greater government support for increasing contributions – such as recent moves to lower the age of autoenrollment – could also play a key role in increasing the size of the market.

Finally, some master trusts highlighted the key role they can play in demonstrating best practice to the rest of the pension industry, including how they can deliver lower costs and better investment outcomes to help scheme members achieve their retirement goals.

The impact of Value for Money

Representatives from the Pensions Regulator and HM Treasury on our Value for Money session discussed how regulatory requirements impact master trusts and how they can demonstrate value to their members.

Although there are many examples of how master trusts have delivered great outcomes for scheme members – the data is often inconsistent and not comparable, and this has made it difficult for master trusts to compete. However, delegates heard how the government is keen to help master trusts and the workplace pension sector demonstrate how they are delivering value for money.

The Value for Money framework may drive further consolidation in the industry, as smaller schemes wishing to join larger trusts can compare them across measurable metrics such as investment performance and costs.

While the industry is making steady progress in creating good value for money and implementing processes to improve comparability, some schemes need to catch up. This may ultimately lead regulators to resort to enforcement in some circumstances, although engagement would be the first step.

Delivering diversity in the sector

Several master trusts spoke about their actions to improve diversity, equity and inclusion (DEI) within their scheme’s management to better reflect their membership. Several master trusts explained how about they are trying to encourage more people from minority backgrounds into the industry.

While recruiting people from a diverse range of backgrounds can be challenging, master trusts are using practical techniques, such as anonymising CVs. Others are considering applicants without an industry background but with expertise in other areas and industries.

However, it remains a challenge to improve DEI within master trusts at the trustee level.

As member communication is the primary way of reaching often diverse memberships, some schemes have been experimenting with increasingly targeted e-mails and other literature.

Future-proofing defaults

In the final session, master trusts discussed the steps they are taking to help future-proof their default options. The debate heavily featured the Mansion House Compact, a voluntary initiative that allows pension scheme signatories to express their interest in increasing their allocating to unlisted UK equites, which the government hopes will boost the economy. Some master trusts stated that they have already signed up to the compact but many more are still considering what it would mean for their members.

Much of the discussion focused on how the reforms could impact the risk profile and diversification of their investment portfolios. Some schemes were happy to make greater allocations to private equity due to the higher expected returns from the asset class; others preferred to adopt a wait-and-see approach before making any changes.

A key consideration in master trusts’ investment decisions is the broad range of members they serve, the forum delegates agreed. All remain focused on delivering the desired outcomes for their varied members.

Default strategies are becoming increasingly sophisticated to cater to a widening range of risk appetites. And some master trusts reported that their members prefer flexible strategies that allow them to change their minds, rather than committing to specific outcomes.

Some master trusts are embracing ESG in their default strategies, based on the assumption that most members want their pension savings to impact the world. However, depending on how integrated ESG factors are in the investment strategy, this can involve greater sophistication.