The master trust sector is set for a seismic shift, with consolidation predicted to surge once the dust settles on the post- authorisation landscape as employers find new homes for their workplace pensions.
This anticipated consolidation comes at a time when the amount of money flowing into corporate pensions is increasing exponentially thanks to increased minimum contributions and the continued shift to DC.
As corporate advisers consider the options for their clients, engagement looks set to be one of the key differentiators for schemes, said delegates at a Corporate Adviser roundtable, Master Trusts: Improving Engagement, in London last month.
With little separating providers in many areas, a majority of delegates at the event agreed that a provider’s ability to engage with members in a way that would lead them to take actions that would benefit them, from increasing contributions to understanding at-retirement options, would be a significant differentiator in terms of achieving better member outcomes.
At the roundtable, Aegon head of master trust Kate Smith set out the challenge ahead. “Auto-enrolment has undoubtedly been a force for good and has helped boost the numbers saving into a workplace pension.
“But it is clear this is not everything. One of the challenges is to engage members and encourage them to boost contributions levels to ensure they have adequate levels of retirement savings.”
Barnett Waddingham partner Paul Leandro pointed out that the tripartite structure of master trusts can, in some cases, be a hindrance to attempts to improve engagement levels, when compared to single-trust arrangements, so extra care is needed to ensure engagement is maintained when employers move scheme.
“It depends on who the master trust is, and the relationship they have with both the employer and employee. If the master trust is removed from the employer and
doesn’t understand what they are trying to achieve, this could lead to disengagement,” he warned.
He said advisers needed to have an eye to ensuring alignment between the interests and objectives of employers and that of master trust providers. “It is important for providers to understand what the employers objective are,” he says. “For example, are they simply looking to ensure they comply with current regulations, or do they want to ensure employees have adequate pension provision to address issues such as enabling an ageing workforce to be able to afford to retire?”
Understanding the employer’s objective was seen by delegates as a key driver of achieving more successful engagement strategies, delegates agreed.
Premier Pensions head of employer services Sue Pemberton said the interests and objectives of commercial or insurance- based master trusts, with decades of experience of nudging customers to paying more in, are aligned with members, because both provider and member benefit from increasing the volume of assets, in the accumulation phase at least.
“These master trusts are looking to gather assets under management and boost contribution levels. This will benefit the member too as it results in larger retirement savings,” she said.
The right medium
Technology was seen by delegates as another key way to engage this millennial generation. However, most of the panel agreed that digital services alone are not the only solutions. Face-to-face guidance, call centres and regular onsite events and workshops, can all help with engagement programmes.
Delegates discussed the engagement strategies of larger mass market master trust providers who rely almost entirely on digital platforms and online communication channels.
While the panel agreed that digital solutions can help boost employee engagement levels there was disagreement about whether a digital-only service optimises this. Lane, Clarke and Peacock principal Philip Audaer said that given the demographic of master trust providers with employer numbers running into the tens of thousands and even millions, this can provide an effective means of communicating with members.
However, he added that take up rates for online pension services can be typically in single figures, so the engagement impact of an online-only approach should not be overestimated.
Many of the panel agreed a multi-channel approach can be the most effective way to improve overall levels of engagement – and achieving engagement at times and in ways that actually matter, such as at key life turning points. This should include call centres, plus the option for more face-to-face guidance and hand-holding, particularly as members approach retirement.
Leandro said he had seen evidence that providers were better at measuring the engagement they achieve through call centres these days – measuring service levels on the basis of the quality of the outcomes achieved rather than the number of calls an individual operative completes within a given time.
Learning from GPPs
Aegon commercial director of workplace investing Linda Whorlow argued that master trust providers could learn from the decades of experience in selling pensions that life insurance providers had.
She said: “GPP providers have over many years spent hundreds of millions of pounds developing the infrastructure, capabilities and solutions to engage with customers – innovations such as being able to facilitate saving to and through retirement seamlessly. These capabilities are there to be learnt from and applied to well-run master trusts.
She also argued that big commercial providers could use their insights from their existing and historic client banks to better understand the real needs of the members within the master trust.
“At Aegon for example, 1.5 million of our 3 million savers are workplace customers, giving tremendous behavioural insights into how they want to interact, what is important to them and how we best engage – in a way that will lead to better outcomes. It means we can use data analytics to look at the Big Data we hold to identify trends and cohorts of members, so we can communicate with members in a segmented way the right messages for them in a targeted way – the right message, to the right member, at the right time.”
Whatever platform is used, the panel agreed that innovation is key, with intermediaries backing innovations in video and virtual reality services, as well as those able to link pension services to other financial products through banking apps.
Some delegates supported the idea that every time members log on to their bank account they get a snapshot of what their pension is worth. But others pointed out that there was the danger that this could have the opposite effect, particularly among those who are less financially sophisticated, an impact that would be particularly intense during prolonged periods of poor market returns.
First Actuarial DC consultant Antonia Balaam said: “There is the danger that people will panic if they see the value of their pension has gone down. People need to check their bank balance frequently as they will be making regular transactions, want to check their salary has gone in and so on. But on a longer-term investment plan I don’t know whether this is as helpful.”
Whorlow explained how Aegon is using staff panels, currently with 9,000 members, to provide more detailed information and to help corporates and trustees understand what is important to members, and how they can target and communicate specific cohorts.
“We have recently made available for our larger employer clients the ability to create their own branded staff panel. So the members have a voice in the pension scheme. The company can create a community in their scheme, and have a say in how their scheme is designed.”
Delegates thought initiatives of this sort had the potential to deliver added value and to increase engagement levels, both in terms of insight and also by creating champions for the scheme inside organisations.
Most agreed that segmentation will be key to driving this engagement, not least in improving communication sent to different members, at different times. Most also agreed that information gleaned from staff panels should be able to help with this process.
Balaam said: “This kind of information can be very useful. It’s easy for corporates — and for providers — to assume they know what employees want and value from any benefit programme. But they often can be surprised by the results.”
Audaer added: “As these forums start to be developed it should help generate a lot of sector specific information which has the potential to be of interest.”
He said this provided the potential for more effective benchmarking, across the industry, which would have a kick-back value to employers in terms of what their peers are doing.
The panel agreed that one of the key issues was engaging with members ahead of retirement, and whether the industry should create default pathways into retirement to allow members to avoid making a personal decision, or whether they should be forced to face up to the options ahead of them and make an active choice. With many retirees still having DB savings, this issue has not come to a head yet. But as the shift from DB to DC takes place, some argued this decision will become more pressing for retirees. Several on the panel argue that without any other form of income, members will be forced to take some responsibility and make a decision on how they are going to use these workplace pensions to generate a retirement income.
But Balaam said there is a danger of “paralysis” with people being unable to fully understand their options and make a decision. She called for master trust providers to include one or more drawdown default options – perhaps kicking in at the age of 70 – for those in this situation.
To date there is reluctance from trustees and providers to do this, and a question over who would be responsible if funds are depleted more quickly than anticipated.
Pemberton could not see how such a default strategy could work. She wanted the industry to do more to “encourage people to take responsibility” for these retirement decisions. A default fund inevitably takes more of a one-size-fits-all approach, which she said is unlikely to be suitable for many.
Smith pointed out that this is an areas the FCA is looking at, through its retirement pathways projects. It is likely in future that providers will offer a number of “default” options for non-advised members, which will require members to make some basic choices about their retirement options, but gives them a managed portfolio aligned to certain risk preferences.
Balaam concluded: “No-one is saying this is an easy issue to resolve. But on principle it is an issue that the master trust sector needs to address, if we want to deliver the best outcomes for all members.”
Towards sophisticated investors?
While master trust defaults typically have more than 95 per cent of members invested in them, some in the industry argue there is a role for educating individuals to a level where they can choose something more suitable for their needs.
Delegates at the event were concerned that such a strategy involved a form of engagement that could backfire. Leandro pointed to evidence from Australia that suggests that those who self-manage their funds tend to underperform the larger “super trusts”. He says this trend has started to reverse, with many of those approaching retirement now opting into the larger professionally-managed portfolios as they come to take benefits.
Many of the panel though that rather than solely focusing on fund performance, there are other aspects of the investment process that could help stimulate engagement with pensions.
One key way to do this is by implementing and communicating a clear ESG strategy, and drawing rich narratives about the positive investment decisions being made on behalf of scheme members that would engage with at least a proportion of them on an emotional level.
Hymans Robertson partner and senior consultant Rona Train said: “We definitely see a lot more engagement and interest around ESG and climate issues, particularly with millennials. People want to know how their money is being invested, particularly in relation to issues like climate change, or executive pay.
“We need to explain better how they money invested through workplace pensions can influence companies to make positive changes. For example we see LGIM talking about how their engagement with Shell has led to executive pay being linked to its track record on pollution and carbon emissions.”
Pemberton agreed, and she says amongst this younger generation there is also now far less stigma attached to pensions, replaced with a more positive and considerably
less jaundiced view of retirement saving. “This generation doesn’t remember the Maxwell or pension mis-selling scandals. They have a more positive starting point which should mean they are more receptive to providers’ attempts to engage.”
Pemberton said one of the key ways to get employees to increase contributions is to encourage employers to boost matching arrangements. “Engagement has to work with employers too. It is engagement from clients that can make a substantial difference. It is important for them to look at pensions as a tool for recruitment and retention, not just a compliance issues.”
She said that a progressive matching contribution approach can be an effective way to addressing the increasingly prevalent issue of employers faced with an ageing workforce that does not have sufficient pension assets to retire. This blockage of staff turnover can lead to productivity issues and a lack of innovation and renewal in the workplace, she said.
As the master trust market matures, engagement looks set to become an increasingly important differentiator between providers – the basic challenge facing DC is that people need more pension, and pensions need to be sold.