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What impact will the Covid-19 epidemic have on growth in the master trust sector?
Master trusts were already growing fast. We expect the financial pressure on UK PLC caused by Covid-19 to accelerate this trend, driving growth in the master trust sector of over 20 per cent annually for the next five years.
Covid-19 will make employers look for ways to simplify their business model and reduce costs. For employers with their own trust-based defined contribution (DC) pension scheme, a switch to a master trust can lead to cost savings of hundreds of thousands of pounds. The sophistication of today’s master trusts means switching can be a genuine positive, as members can benefit from a richer range of services, better technology and an expertly run investment proposition.
Will technology disrupt the master trust sector?
We think so. We already have web-based services for the master trust and will be launching a master trust app later this year.
Group personal pension customers that are also Lloyds Banking Group customers already benefit from a single customer view that shows pension valuations within the banking app. So far around 300,000 scheme members have notched up 50 million pension valuation views, a level of engagement that is virtually impossible through pension alone.
But we want to bring all members on this digital journey and will bring single customer view to our master trust too.
We have also engaged with a project with Massachusetts Institute of Technology (MIT) to merge banking data with pension data. We are passionate about getting people to save more, but you have to target people at the right time. For people who are really struggling financially, a nudge to pay more into their pension is a really bad message. But there are lots of people who do have money to spare right now, because their expenditure has been reduced.
This is part of our plan to front run open finance. Moving from a single employer trust to a master trust gives members the opportunity to play a part in the open finance revolution.
How can DC schemes ensure their investment strategy remains fit for purpose?
The fast-moving market and regulatory environment mean maintaining the highest possible standard of investment management demands a significant level of resource.
Big master trusts are well-positioned to deliver this through scale, ensuring they invest in a truly diverse range of assets and embrace the latest investment thinking, backed up with deep interactions between trustees, in house experts and external investment advisers. With 3.3 million workplace pension customers, Scottish Widows can access economies of scale effectively.
In recent months we have introduced Reits, emerging market sovereign debt and currency hedging, as well as establishing a new responsible investment and stewardship framework. Work is also ongoing with integrating environmental, social and governance factors into investment processes.
Ceding trustees, scheme sponsors and members should be confident that members transferring to a master trust are moving to a quality solution.
What about the investment experiences of retiring members? Concerns in this area have been the driving force behind the Financial Conduct Authority’s (FCA) investment pathways initiative. While The Pensions Regulator (TPR) is yet to introduce a similar requirement in the trust-based world, trustees will want to ensure that retiring members are heading towards good outcomes. We already have integrated drawdown and are implementing investment pathways for our contract- based customers. We are now in discussions with our trustees about how we implement something similar for master trust scheme members.
What has the Covid lockdown taught us about the robustness of master trust providers?
Lockdown has tested pension providers’ strength in the face of adversity. Ceding trustees will want to find out how a master trust performed through the early days of the crisis in terms of responding to calls and maintaining time-critical processes.
But Covid will continue to have an impact as smaller, weaker master trusts see their business model hit as furlough is withdrawn, unemployment increases and pay rises falter. Going forward, schemes will benefit where they invest in a broader range of trustees from a diverse range of disciplines.
How disruptive is the transition process for members?
While the transfer of a single employer trust to a master trust can take between six and 12 months, the actual impact on members can be minimal. Asset transition costs are typically covered by the receiving master trust and today’s pre-funding and re-registration techniques are more sophisticated than they were in the past, meaning out of market risk is minimised.
Welcome letters and joining packs are standard on a transfer, but we have been working hard to improve the digital sign-up process, meaning engagement can be increased significantly.
Click here to download your copy of the Corporate Adviser Guide to Transferring to a Master Trust, published in association with Scottish Widows