Is it time to reframe the master trust debate?

In many cases, performance – boosted by strong equity and bond returns over the past three years – has been impressive. But it is time success or failure in this market was viewed in a different way.

How can a single generic investment fund be appropriate for multiple businesses with different contribution levels, age profiles, and average salaries?

It is estimated that, by the 2020s, almost 14m people will be saving in a DC pension, of whom 90 per cent will be in the default, making them critical to the retirement aspirations of huge swathes of the UK population.

Yet typically they are not constructed – and therefore assessed – in a way that makes long-term sense for the members within them or the employers selecting them.

Risk/return balance needs to be part of the debate

At a minimum, a ‘good’ default should take account of the likely characteristics and needs of the employees who will be automatically enrolled into it.

It is likely that employees will not be engaged in financial decisions and therefore, these will need to be taken for them regarding their risk profile. As such, there should be an appropriate balance between risk and return for the likely membership profile and the charging structure should reflect this balance.

To date, this has not formed a large part of the debate. On the whole, performance reviews have focused on individual generic funds (representing the bulk of the mastertrust market) rather than the full glide path.

This may be of limited value without reference to a default’s overall strategy and target outcome. Nor does a stark performance comparison, already problematic given the absence of a single benchmark, take into account the levels of risk being undertaken.

In many ways, the focus on fund returns reflects the composition of the mastertrust market. Many providers have insurance backgrounds, and their propositions are little more than rebadged personal pension plans.

Bolting together a number of cheap funds to form a generic default provides no true governance and in effect encourages firms to consider performance in terms of the short-term value of their assets at a single point in time; something that is essentially meaningless when what matters most is the income stream provided to members in retirement. That is the prism through which master trust default funds should be viewed.

Custom defaults can be tailored very specifically to members to take account of their average age, salary level, contribution rates and employer support.

They can even be customised to align with members’ spending behaviour and goals at retirement, an increasingly important advantage in a post-pension freedoms world.

Moving the needle on the debate over mastertrusts will take time. For us, the issue is simply this: how can a single generic investment fund be appropriate for multiple businesses with different contribution levels, age profiles, and average salaries?

The answer is, it can’t. The industry needs to start looking at mastertrust defaults in a way that makes real-world sense to the members they serve.

Ashish Kapur is head of UK institutional solutions at investment manager and mastertrust provider SEI