It will be several months before the Pension Regulator announces the final list of authorised master trusts. But this ongoing process is already driving significant change within the sector.
Technology will play a pivotal role in helping master trusts remain agile and competitive, while improving member engagement and driving efficiencies, said delegates at a Corporate Adviser round table in London last month.
Cardano and Now Pensions head of DC Ralph Frank said there are a number of ways in which new technology will make master trusts more efficient, and more effective at driving member engagement.
“There is often a lot of focus on the front-end applications, and the whizzy apps that are offered to members. But one of the biggest opportunities for master trust providers is to make back end systems more efficient.”
Given the complexity of pension administration systems, particularly in relation to auto-enrolment rules, Frank said that effective use of technology can help streamline this process and effectively lower costs.
“This makes the whole journey of enrolment, from collection of payment and processing contributions through to investment strategy more efficient, delivering tangible benefits for both corporate clients and members.”
He said that master trusts have to look at the segment of the workplace pensions market they are operating in, and ensure there is an “appropriateness” between the product service and related cost.
“In the AE market most people will be best served by a simple-to-run, low risk option that delivers at a competitive price point, rather than a proposition with the full bells and whistles attached.”
Bravura Solutions business development manager Natanje Holt agreed that when it comes to technology, there is often a focus on front-end applications, at the expensive of overall system capability.
She added that master trusts that innovate can use technology to help drive down costs, but there are a number of other advantages as well. As trusts grow in size, there is the potential for ‘deep dive’ analytics, she said, to understand members better, anticipate their needs, and shape the master proposition accordingly.
Over the next decade it is widely expected that the number of master trusts will reduce significantly, and the assets held by these ‘mega-trusts’ will rise exponentially.
Delegates at the round table event expected the ‘big data’ held by such trusts to drive change in this sector.
Given that the vast majority of auto- enrolled scheme members end up in the default fund, could data on their financial behaviour be used to map a more individual default that is better tailored to their needs?
Mercer solutions leader for DC and individual wealth Philip Parkinson said this certainly isn’t “pie in the sky” thinking, and suggested this kind of innovation is entirely possible within the next few years.
“The more providers know about someone, the better placed they are to tailor a solution to their needs.” He pointed out that default funds are effectively devised in the absence of individual knowledge, but usually rely on proxy factors such as age.
He agreed master trusts are well placed to collect a range of various data points from members, particularly providers that offer multiple touch points with customers through other financial products.
Parkinson said master trusts will increasingly look to know as much about the individual – from a variety of sources – to shape investment strategies. Initiatives like the pensions dashboard will help this.
Parkinson said this kind of data can shape a default strategy. “There may be a reluctance from some providers, a ‘regret risk’ if you will, that they don’t know everything so may not devise the ‘right’ strategy. But you could argue that doing nothing, and treating everyone the same is unlikely to deliver better outcomes for members.”
LGIM head of DC solutions Emma Douglas said the amount of information about members that becomes available will increasingly be an issue for both master trust providers and trustees. “If we have this information, should we be doing something with it, or risk being accused of sleeping on the job?”
Douglas raised the questions of where such focused investment strategies start to shift into advice. “This will be an interesting challenge for the future. Is there a danger of knowing too much, having a relatively full knowledge of the individual, and then giving advice on this basis? We will have to see what the definition of advice is in this new world.”
Standard Life head of proposition Jenny Holt said there could also be regulatory challenges if master trust providers don’t act on this information. “There may be questions asked of the role of the trustees and whether they are acting in members’ interests. Should trustees stop members from a certain course of action, if they know they have, for example, a critical illness?”
She said that there is potential to take this kind of personalisation much further, and address a whole range of wellbeing issues. “We know that one of the result of short- term financial hardship is the larger impact this has on long-term financial wellbeing.
“If there are the analytics and the data to anticipate that, and provide a short-term cushion, this has the potential to significantly boost long term outcomes for members.”
Other delegates pointed out that it is this type of innovation that will take master trust propositions beyond a simple pension option. David Bird, director of LifeSight at Willis Towers Watson noted that Nest is already exploring a broader approach through its ‘sidecar savings’ scheme.
When it came to improving member outcomes, delegates debated whether a track record of increasing contribution rates could be seen as a hallmark of a good master trust scheme. Will ‘retirement adequacy’ be a key target for master trust providers, and can technology help them deliver this?
Many attending the debate thought this was too narrow a metric to judge the success of a master trust proposition.
The People’s Pension director Gregg McClymont said that higher contributions — and engagement levels — are typically correlated with wealth, so much will depend on the demographic of the membership.
“There will be cases were people do not have savings of £200 to pay for a broken down washing machine. Arguably in these cases trying to increase pension contributions may not be in the member’s best interests.”
Douglas said the goal should be getting members to be better engaged with their wider finances, and pension options in particular, rather than broad brush targets for contribution levels.
“Technology can help massively with this. It most cases it’s hard to see why encouraging people to pay more into their pension is a bad thing. But it’s important to remember this isn’t right for everyone.
“It would be great if we could get to a situation where people are contributing 12 per cent, split between employer and employee, but we are some way from that.”
Standard’s Holt added: “It’s about using technology for broader decision support, rather than focusing on a single metric, like contribution levels.”
She pointed out that this also applies to decisions made around retirement and utilising pension freedoms. “There is an environment that nudges people into a pension scheme, and sets a minimum level of contributions. But members aren’t given this kind of support when it comes to making decisions at retirement. Master trusts need to use technology to help members engage with these issues.”
Nudging contribution increases
Frank said that technology can drill down into these analytics and provide all the data on how much people need to save to meet a certain retirement goal. But he added the real challenge for providers is getting members to open the email, or read the mailshot that explains this.
McClymont contended that there is little evidence to suggest pension providers can “nudge” the majority members to save more, via these sort of targeted engagement programmes. Compulsion, or programmes like AE can deliver results he said, but public policy must take into account the complex financial needs of different segments of the population.
Bird said that he did not think it is the responsibility of master trusts to address issues of retirement adequacy. Their responsibility is to provide members with relevant information to enables them to make better decisions about their retirement, he argued.
Parkinson said: “No-one is giving up on the idea of ‘retirement adequacy’ as a goal. This is an issue for corporate clients if employees can’t afford to retire.” He argued this is best done through engagement, and expects technology to play a part in this.
“Most people living and working outside the financial industry are comfortable using smart phones for shopping or basic banking They are comfortable engaging with their finances via this medium. They just don’t put pension in this same bucket.”
The challenge for the master trust industry, he said, is to bring workplace
pensions into this wider financial context. The trusts that manage to do this have the potential to boost engagement and contribution levels he says, benefiting both provider and member.
But when it comes to engaging members, master trust providers said currently different options are yielding the best response.
Douglas said: “We’ve found video links to have been one of the most successful ways of boosting member engagement.”
These short links can be personalised, to show what members are on track to receive in retirement, and what they would receive if they paid more in. She said: “The key is there’s an element of immediate gratification, so viewers can click a link and make these changes straightaway.”
Bravura’s Holt pointed out that master trust providers need to look at removing any barriers to action. “People don’t want to go away, find their policy number and password to log into a pensions account.”
Delegates attending the debate agreed that the master trust sector is set for significant evolution in the years ahead. And they did not rule out more radical transformation through the entrance of external players. Bird said: “There is the possibility for new entrants and possible disruptors in this market.”
He said companies like Uber have utilised technology to transform the transport sector, and questioned whether there was an opening for a similar seismic shift in the workplace pensions market.
Frank pointed out that in Australia an open market architecture enables employees to choose whatever pension scheme they like: they are not limited to the scheme chosen by their employer.
Open banking initiatives in the UK could potentially pave the way for a similar model, although there was debate about whether this would deliver real value for members.
Frank said: “If you are confident that you have a quality scheme that delivers value for member why wouldn’t you welcome this?”
But McClymont points out that the evidence from Australia — and other countries — is that people can be persuaded to switch, by other incentives, which don’t necessarily align with good long term retirement outcomes.
It remains to be seen whether there will be this kind of radical revolution within the master trust sector. But it remains clear that as the sector moves towards the post- authorisation phase, the pace of change shows no sign of relenting.