Analysis: Greater efficiency and the ability to access a broader range of investments are some of the reasons why mastertrusts appoint third party investment platforms, but as with all providers, monitoring is key, experts say.
This month the BlueSky Pension Scheme, one of the UK’s largest mastertrusts covering more than one million employees, announced its appointment of investment platform Mobius Life as administrator for a range of target date funds, which are offered as a member default.
Efficiency and innovation
In February, the Defined Contribution Investment Forum called for mastertrusts to place greater importance on investment design to achieve the best possible outcomes for members.
It’s the trustees that need to be happy that the operation of the investment platform is robust
Paul Leandro, Barnett Waddingham
Investment platforms are one way in which mastertrusts can access more innovative investment structures, according to Ken Anderson, head of DC solutions at Xafinity.
He said that investment platforms often allow trustees to create blended funds for their members. “Under this approach, the trustees can blend several funds together with different asset classes and return drivers, minimising volatility for given levels of targeted investment returns,” he explained.
This might be attractive to a mastertrust because it enables “sophisticated and innovative investment structures to be made available” without confusing members, Anderson said.
A desire for greater efficiency is also a key driver. When schemes offer investment directly held with investment companies, switches between funds and investment of contributions can be slow, he said.
When changing a member’s investment, for example, an asset manager has to be instructed to sell a fund, send the money back to the trustees, who then send the money to a new provider for investment.
“This process can take several days, or even weeks, during which a member’s savings are not being invested, creating ‘out of market’ risk,” Anderson noted.
In general, investment platforms frequently facilitate “access to a much broader range of investments and quicker trades, often enabling investments to be bought and sold at the same time” he explained.
Anderson added that he expects this trend of using investment platforms to continue.
Nick Gallimore, director at Mobius Life, also expects more mastertrusts to use investment platforms, “as an effective means of delivering effective investment administration, leaving them free to focus on providing member administration”.
Review providers
Mastertrusts are operating in an environment where there is significant cost pressure, and consolidation is said to be inevitable, although it is unclear how this would tie in with the use of investment platforms.
Paul Leandro, partner at consultancy Barnett Waddingham, said many mastertrusts use third-party investment platforms because “it becomes more cost-effective to do so” once a mastertrust has reached a certain size.
Leandro said that “it’s the trustees that need to be happy that the operation of the investment platform is robust, and is working in members’ interests”.
If they are not satisfied, and have appointed the investment platform directly, they can review the investment platform. If they have sub-appointed through an administrator, then they should let the administrator know that they have concerns, Leandro said.
DCIF: Mastertrusts must up their game on investment design
Mastertrusts must place greater importance on investment design to achieve the best possible outcomes for members, the Defined Contribution Investment Forum suggests.
Anderson also highlighted the importance of reviewing providers: “In well governed mastertrusts, the trustees continually review all service providers and, where required, replace them, ensuring that members receive value for money and good outcomes.”
He added that “some boards of trustees do not review providers as often as they should”.
Visibility concerns
Richard Butcher, managing director at professional trustee company PTL, agreed that investment platforms are “a lot more flexible” and “enable you to get in and out of things relatively quickly”.
However, he said that “you don’t get a lot of visibility of what’s going on” when delegating to someone else.
“You have a lot of opacity around costs and charges, even more so than when you have a direct relationship,” Butcher said.
The true cost of investment is “hidden and wrapped up in the platform charge”, and the platform may not disclose the true cost of the investment because it is subject to a confidentiality clause in the agreement that it has with the underlying fund manager, he explained.
