Master trusts warn cost concerns overshadowing investment quality

The report, which summarises the findings of a survey put to 18 of the UK’s largest master trust providers, found that a clear majority believe a strong focus on cost in the master trust market has a stifling effect on master trusts’ ability to develop their investment offerings.

Nine of the 18 respondents agreed with the statement that a focus on costs was preventing them from developing said propositions, with a further four strongly agreeing with the statement. 

Sponsors need to take a good look at master trust providers’ history and wider businesses to establish whether this is something they’re truly committed to

David Snowdon, SEI

Just one strongly agreed that clients and consultants put sufficient emphasis on the quality of the investment proposition and a further four agreed, while five disagreed and five more strongly disagreed.

“We and many of the schemes we spoke to feel that investment is still not being given the priority it deserves given its importance in determining eventual member outcomes,” the report states.

“This reflects the belief that many employers put more emphasis on other, perhaps more immediately tangible aspects of the proposition such as member communications, online services and, ultimately, cost.”

Numerous examples were related to the DCIF of business being lost to competitors, despite them having “demonstrably weaker” investments offerings and poorer performance, apparently because they were able to offer fees just a few basis points lower.

However, respondents were optimistic that investment quality would gain its due recognition in the long term, the report noted, with increasing focus on integrating environmental, social and governance standards into portfolios, as well as the need to build effective retirement solutions swinging attention back to substance rather than cost. 

David Snowdon, DC director at SEI, tells Pensions Expert that this rebalancing of the scales is vital, not least because we are in “a buyers’ market” where “delivering flexible and reliable schemes takes priority”.

“Sponsors need to take a good look at master trust providers’ history and wider businesses to establish whether this is something they’re truly committed to,” he continues.

“The industry will find that sponsors will gravitate toward firms that have a demonstrable and clear focus, with their master trust contributing to, and aligned with, their wider business goals. Sponsors will also look to providers that can demonstrate both their past and future commitments to developing the product and wider investment propositions.”

Asset managers should be ‘more realistic’

The master trust providers surveyed for the report were overwhelmingly of the opinion that assets managers could help achieve this goal, particularly if they were to take “a more realistic approach to fees”.

Eleven of the 18 respondents cite this as being key, with many providers believing asset managers are too short-term in their approach to fees, though they acknowledge the need for asset managers to make a commercial return.

“[Providers] argue, not unreasonably, that they can offer asset managers a high degree of certainty of future inflows and so would like to see that future potential recognised in lower fee rates today, rather than the promise of discounts when that scale materialises,” the report notes.

More broadly, DCIF argues that greater transparency around fees, in particular separating what is being spent on investment from other charges, will “help employers and members understand what they are paying for and allow for a more effective appraisal of investment value”.