Mastertrusts must place greater importance on investment design to achieve the best possible outcomes for members, a new study suggests.
From value for money to governance issues, mastertrusts have come under increased scrutiny, particularly when it comes to regulation.
If everyone is reading off the same hymn sheet, all you’re going to have is 100 mastertrusts that all look very similar
Chris Roberts, Dalriada Trustees
The Defined Contribution Investment Forum, a group of investment managers and other industry participants, conducted a study that found that although it is still early days, mastertrusts have primarily concentrated on communication, governance and administration.
The research showed that investment design is much less of a priority for mastertrusts, while what is meant by 'good value for money' needs greater clarification.
Clarification and consistency
The DCIF called for a heightened focus on offering new, modern default investment solutions.
There was also a proposal for consistent performance measurement across all mastertrusts, with quarterly reporting on how a typical 25, 35 and 55 year old invested in a default fund have fared.
Elsewhere, the study said there is more focus on cost than value among mastertrusts, with most leaning towards passive management.
DCIF executive director Louise Farrand said that “a great deal of money is being invested passively” and questioned whether this is in the best interest of members.
Passive “is clearly a very important component”, she said, though she added that it is important to have quite a wide range of investment styles in the default fund, particularly given current political uncertainty.
“The last thing we want is for [members] to end up looking at their pension fund and seeing it performing quite erratically,” she said.
Farrand mentioned that it has been a very busy time for mastertrusts in terms of getting set up and complying with regulation.
However, she said that it is now time for them to turn more to investment strategies.
The two most important factors in terms of what the member gets at the end of their saving journey, she said, are investment returns and contributions.
Investment strategies must meet workers' needs
Mark Fawcett, chief investment officer of mastertrust Nest, said that the report “highlights why high-quality, well diversified and thoughtfully managed investment strategies are so important for member outcomes”.
He added: "The millions of workers who’ll start saving into a pension for the first time through auto-enrolment deserve nothing less. They’re a new generation who’ll rely on these pensions to see them through in old age. It’s vital that investment strategies are designed to meet their needs.”
When it comes to the topic of prioritising investment design, Ian McQuade, director at consultancy Muse Advisory, said that “the picture is mixed”.
“Many trusts have certainly focused time on the investment design during the accumulation phase, and several are looking for ways to introduce investment ideas to their portfolios to enhance returns to members,” he said.
Under pressure
However, McQuade noted that mastertrusts are operating in an environment where there is significant cost pressure.
State of the nation: What's going on in DC accumulation?
One of the spectres that hung over the announcement of freedom and choice in the 2014 Budget was the fear the proposition would be so attractive people would abandon their defined benefit schemes to make the most of the flexibility.
“That cost pressure then drives a simplification of the investment structure, hence the general merging of the defaults into similar designs,” he said.
Cracks show over member involvement as MPs debate mastertrusts
As the pension schemes bill on tougher mastertrust regulation is passing through parliament, some have called for making member involvement in mastertrust governance mandatory, but it is feasible?
With regard to value for money, McQuade said greater clarity is required regarding the full disclosure of costs that sit behind the annual management charge or total expense ratio.
“Understanding the costs will allow trustees to better question the managers and drive better value for money, either through lower costs or getting more for the same cost,” he explained.
Encouraging innovation
Chris Roberts, professional trustee at Dalriada Trustees, agreed that although governance, communication and administration matters are important, ultimately, “the returns are going to be born out of investments”.
And when it comes to value for money, Roberts said he hoped that some of the industry work on transparency will help.
He noted that there was much discussion of sharing ideas and working together in the DCIF study.
But “if everyone is reading off the same hymn sheet, all you’re going to have is 100 mastertrusts that all look very similar”, he cautioned.
“Let’s start encouraging ideas and innovation rather than trying to get everyone into a rigorous mould, because the [mastertrust] industry is in its infancy… so we want it to develop the right way.”
