As today’s master trusts evolve into the asset-rich behemoths of tomorrow, competition between them is set to become increasingly intense. Deeper member insights, intelligent defaults and investment innovation will all play a role in determining which master trusts win the battle for market share said delegates at a Corporate Adviser / Scottish Widows round table debate last month.
Speakers at the event predicted that consolidation will happen both sides of April’s authorisation deadline, with some smaller master trusts waiting until they are authorised before selling out to consolidators in a bid to push up their value.
Delegates predicted a decade of evolution for the master trust sector, with the potential for as yet unnamed new players from the asset management sector to enter the market, while merger and acquisition of existing players concentrates the pool of providers.
Competitive sector
Barnett Waddingham national DC consultant Andy Parker said the exponential growth in assets may encourage newer entrants into the market – from the banking and asset management sectors – as well as overseas providers.
With the sector set to grow considerably in the coming years – with industry estimates predicting the combined value of master trust assets will grow to £300bn by 2026 – intense competition between providers looks set to fuel rapid innovation.
“Not surprisingly there are going to be new entrants into this market, looking to get a slice of this business,” said Parker.
With scores of master trusts already fighting for assets and more big players expected to join the fray, consultants predict significant investment in proposition going forward.
Delegates flagged a number of key factors that providers could exploit to differentiate their proposition –ranging from at-retirement flexibility, financial strength and governance, investment strategy, intelligent defaults, digital engagement, member understanding and functionality.
Scottish Widows head of master trust propositions Graham Peacock argued that as the market matures a distinction will emerge between “investment houses with a pensions arm, and pension providers who have investment expertise”.
He added: “In the workplace pensions arena, first and foremost members will want to ensure that the basics are done well: be it money deducted and invested in a timely way, access to online statements and so on. Investment houses may be less interested in the nitty-gritty of what makes a good workplace pension or master trust.”
Buck head of DC and wealth Mark Pemberthy said that in a more competitive marketplace, the key differentiator will be factors that have the biggest direct impact on members.
From an advisory point of view this will include both the investment strategy and the quality of engagement with members.
However, he agreed that “top-notch administration” will remain an important factor. He said that administration remains a significant issue in the market, being one of the main catalysts for employers switching pension provider today.
Intelligent defaults?
Fast-forward five to 10 years and delegates expect there will be a handful of master trust behemoths with huge scale, while other smaller providers would also remain, servicing niche target markets. Consultants and advisers at the event agreed the ability of providers to tap into big data to understand the membership of their scheme would potentially be a key differentiator.
Today’s master trusts do the job of finding out what their membership want and need from their scheme by using customer surveys and feedback from member engagement tools – engagements that generally achieve relatively low levels of insight.
Peacock said those providers that had existing relationships with a large percentage of their membership through other product lines – such as those part of banks or big insurance companies – would in future be able to gain deeper insights into the membership of their master trust that other providers would not.
Not only would this make basic understanding of the profile of the membership easier to achieve, but the huge amount of data on members that would be available to these multi-channel providers would give the potential for “more intelligent defaults” to evolve – defaults that respond to the individual’s lifestyle, rather than a general lifestyle glidepath.
Big data approach
Peacock said Scottish Widows – which is part of Lloyds Banking Group – has a “huge data lake”, which could help facilitate a smarter, more personalised approach.
He said: “We could anticipate what members are going to need, looking at a whole range of hooks and data points. Rather than ‘the’ default fund, it becomes ‘your’ default fund, where tweaks and tilts are made depending on a whole range of information. This could lead to better member outcomes.”
However he admitted that this level of sophistication is still some years away.
Delegates agreed a Big Data approach could give deeper member understanding, permitting deeper individualisation of communication and even tilts to the investment approach they experienced within the default, although they pointed out that other organisations, such as HR tech employee health & wellbeing engagement apps, could also compete in the role of customer insight and engagement, and master trusts that did not have a waterfront suite of banking and/or insurance products could partner with them to achieve similar aims.
Investment innovation
Investment strategy is already a top priority for intermediaries advising employers on default strategy. Research amongst around 60 advisers and consultants carried out by Corporate Adviser last autumn revealed that the quality of the provider’s default fund investment proposition is seen as the most important factor when recommending workplace pensions. As providers achieve scale, investment proposition will be a key area for master trusts looking to differentiate themselves against competitors.
Currently, the market is split between providers that use a single asset manager for the entirety of their proposition – sometimes, but not always, with an asset manager that is connected to the provider – and those master trusts using multiple asset managers, with the number of managers rising towards and beyond double figures.
Consultants at the event were comfortable with the idea of a single asset manager being used, provided the asset allocation is correctly done. Pemberthy said: “For us, what is key is the actual investment strategy, particularly at the accumulation stage.
“Is this offering the level of diversification? How are the risks managed? And what are the underlying asset classes members get exposure to? What, for example, is the weighting to asset classes such as emerging market equities and debt or property?
“There is a huge degree of variance on these issues, and this is where master trusts have the opportunity to add value over the longer term. These factors are more important than whether it’s a single or multi-manager offering.”
Price versus value
Parker said that master trusts that have lower cost passive investment strategies may not offer the same exposure to this broader range of assets.
But he said there is clearly room in the market for both investment strategies. “There will be some master trusts saying ‘if you want to buy on value, come to us, but if you are buying solely on price look elsewhere’.”
He argued that at the top end of the market investment strategies are likely to be more sophisticated and smarter, using both active and passive strategies.
Premier Pensions consultant Paul Nunns added that this range of approaches gives consultants the opportunity to work with clients to assess what type of default investment strategy they need.
Single trust transition
One of the key challenges for master trusts will be to offer default options that suit a diverse workplace. Some providers – including Scottish Widows – may be looking to offer bespoke options to certain employers, rather than adopt a one-size-fits all strategy.
Peacock said the option to run a bespoke default fund may encourage trustees of own-trust schemes to move to a master trust structure, which can then replicate their own investment designs.
Pemberthy argued that while this may offer a clear benefit for employers, it does present challenges moving forward. “Master trust providers focusing on larger corporates are likely to have a disproportionately high level of these bespoke arrangements.
“This is going to need additional oversight from trustees, in terms of investment strategies and communication. There may be a finite capacity for these bespoke arrangements.”
Decumulation innovation
It is not just accumulation strategies that will be important for advisers in this space. Delegates at the round table said they expect there to be greater focus on decumulation and at-retirement options.
Master trusts will need to offer full flexibility if they are to compete with other types of group pension said Cavendish Ware associate director Roy McLoughlin. He said: “Retirement has changed.
People are working for longer, and they are taking a more flexible approach to retirement. They are going to need products
that offer the flexibilities that pension freedoms have introduced.”
Master trusts will need to provide more sophisticated investment solutions that facilitate these flexibilities, he argued, and will need to offer the full functionality that contract-based providers are able to offer. But this also needs to be backed by more effective communication and engagement around pensions and retirement, he added.
Sustainable withdrawals
Delegates at the event debated whether the trustees of master trusts have a fiduciary duty to provide clearer guidance on issues such as a sustainable withdrawal rate for drawdown customers. Advisers and consultants agreed that at present many trustees or employers are desperate to avoid all responsibility for drawdown,
palming retirees off into execution-only offerings that give limited guidance.
The most advanced tools available to those seeking to enter income drawdown without advice currently only project the likelihood of running out of money for any given withdrawal rate. None to date go that crucial step further of giving the user what the provider of the tool believes to be a sustainable withdrawal rate.
Contract-based providers of non-advised at-retirement solutions have shied away from taking such a bold step for fear of regulatory comeback in the event that the withdrawal rate proves to be overly ambitious and pots become depleted. But delegates debated whether the more flexible world of trust- based legislation meant trustees could take existing Government Actuary’s Department figures and use it to give members a sustainable withdrawal rate. With the alternative being sending members out into the world of drawdown with no real guidance about sustainability of withdrawals whatsoever, is this not something that trustees could and should do?
Pemberthy said: “In theory the answer is yes, but there are a number of moving parts here. Given the regulatory arbitrage between the FCA and TPR it is probably more practical and less onerous for trustees to take a direct response to this, rather than the provider or adviser.
“However, the challenge remains that members may have other – potentially substantial assets – beyond the master trust.”
Dashboard solution?
Some participants remained optimistic that the pension dashboard – as and when it arrives – will help address this issue. However Peacock said that he was concerned about the “tortuous” progress of the dashboard initiative. “To make it work there needs to be compulsion across the board, including the state pension.
“Without this, it will be harder for master trusts to provide effective guidance at retirement,” he said.
Pemberthy agreed that the dashboard works best with full market participation, but warned that mandatory reporting for all schemes could cause disruption in the marketplace, potentially causing viable businesses to fail as they struggled with meeting the cost of complying.
This could lead to less, rather than more competition in the market, and may ultimately not benefit employees, he said.
He pointed to what he described as a useful parallel in the Open Banking initiative, which was only compulsory for the nine biggest providers.
McLoughlin disagreed however. He thought there needed to be more immediate action for pension providers to digitise records and make these widely available. “It is a real disgrace that there is around £9bn in unclaimed pension assets,” he said.
He said it was fine for master trusts and other auto-enrolment providers to talk up the flexibility of new contracts. But, he argued, more needs to be done to address the industry’s “sour past”. He said the sector should consider more initiatives like the dashboard, that help pave the way to ‘Open Pensions’. This would see data from a number of sources utilised and combined so that workplace pensions aren’t seen as separate from other savings and investments.
Joined up thinking
Parker added that there is a trend for third parties to help manage people’s finances – pointing to companies that switch utility contracts on a regular basis for example. These principles could be transposed to the workplace pensions sector, he argued.
Pemberthy said: “It’s about encouraging good financial behaviours. There are a huge number of financial tools that employees can use to make their money go further, from micro-savings sites, to discount vouchers. but it is not always joined up at present.”
He agreed there is the opportunity for more connectivity, with companies helping employees save money, then rolling some of these benefits into a pension or workplace savings scheme.
Master trust providers may have the size to offer a range of additional services, from workplace Isas to payroll lending options.
Nunns said this has real potential, but the key to unlocking it is ensuring it is simple for employees to sign up and use.
Parker added: “There is a difference between what a master trust offers, and what the master trust provider will offer. But when selecting a master trust we would expect to see a range of other options, from Isas to the full range of employee benefits.”
He said he expects the range of extra services to increase.
Delegates saw digital innovation, big data and smarter investment strategies – at both the accumulation and at-retirement stage – transforming the way master trusts operate in the corporate pension market. This should ultimately boost outcomes for members, while also delivering a better return on investment for the employers contributing to them.