Rise of master trusts

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.

Investment

“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.”

Cost

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.

Governance

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.

Communications

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
high­er fees.

“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

This mate­r­i­al is not intend­ed to be relied upon as a fore­cast, research or invest­ment advice and is not a rec­om­men­da­tion, offer or solic­i­ta­tion to buy or sell any secu­ri­ties or to adopt any strat­e­gy. Issued by Black­Rock Invest­ment Man­age­ment (UK) Lim­it­ed, autho­rised and reg­u­lat­ed by the Finan­cial Con­duct Author­i­ty. Reg­is­tered office: 12 Throg­mor­ton Avenue, Lon­don, EC2N 2DL. Reg­is­tered in Eng­land No 2020394. Tel. 020 7743 3000. For your pro­tec­tion, tele­phone calls are usu­al­ly record­ed.

Black­Rock is a trad­ing name of Black­Rock Invest­ment Man­age­ment (UK) Lim­it­ed. © 2019 Black­Rock, Inc. All Rights reserved. BLACKROCK, BLACKROCK SOLUTIONS, iSHARES, BUILD ON BLACKROCK, SO WHAT DO I DO WITH MY MONEY and the stylised i logo are reg­is­tered and unreg­is­tered trade­marks of BlackRock,Inc. or its sub­sidiaries in the Unit­ed States and else­where. All oth­er trade­marks are those of their respec­tive own­ers.

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

Designing the right master trust

Investment

Cost