With master trusts coming of age in 2019, Newton Investment Management’s Julian Lyne looks at what 2020 has in store for DC schemes
Defined contribution (DC) pensions in 2019 were all about master trusts. Following 2018's intervention by The Pensions Regulator, requiring master trusts to apply for authorisation - and more importantly to demonstrate they meet new, higher operating standards - the number of master-trust schemes plummeted from almost 100 to just 37. At the same time, master trusts have seen significant growth through auto-enrolment. Nest, for example, now has eight million members from over 800,000 employers1.
The consolidation that is resulting from the closure of smaller master trusts should offer benefits to members in terms of governance and administration, where smaller schemes have sometimes struggled. Moreover, many schemes in this rapidly growing area are likely to now have the scale to deliver an increasingly sophisticated and cost-effective offering to members and employers. In this context, there has been a continuing debate over the nature of the investment solutions that should be developed.
Some master trusts' default investment strategies may evolve in parallel with the government's drive for greater diversification, as governance models seek to deliver ‘value for money', not necessarily just being the cheapest. Trusts may use their scale to widen the range of alternative investments, including private markets and infrastructure. While the 0.75% charge cap for default funds has helped to limit investment costs, it has restricted the ability of schemes to offer active solutions where suitable. Active strategies, when applied thoughtfully, have the potential to enhance risk-adjusted returns. Debate over the effectiveness of the cap is likely to continue, but economies of scale should enable trusts to have greater purchasing power, permitting allocation to active and illiquid strategies to deliver meaningful improvements to members' investment outcomes.
A different dynamic this year has been the global ratcheting up of the focus on climate change. It will become increasingly important for schemes to offer members strategies that at the very least have ESG analysis integrated into the investment process, along with active voting and company engagement. Recent research carried out by Newton shows that the average person in the street (and hence DC member) has a real interest in this area, although they may not know how best to act on it2 - but that will soon change, and expectations are that interest will only increase in 2020.
Looking to 2020 and the rollout of the Financial Conduct Authority's investment pathways, master trusts will be seeking to deliver in-retirement solutions, and dealing with the ramifications upstream in the accumulation phase.
While auto-enrolment has been instrumental in increasing participation in DC pensions, member engagement remains low (notwithstanding recent increases in minimum contribution rates), and the biggest DC challenge we have is to get those contribution rates up further!
Julian Lyne is chief commercial officer at Newton Investment Management
Important information: This is a financial promotion. This article is for professional investors only. These opinions should not be construed as investment or any other advice and are subject to change. This article is for information purposes only. Any reference to a specific security, country or sector should not be construed as a recommendation to buy or sell investments in those countries or sectors. Issued in the UK by Newton Investment Management Limited, The Bank of New York Mellon Centre, 160 Queen Victoria Street, London, EC4V 4LA. Registered in England No. 01371973. Newton Investment Management is authorised and regulated by the Financial Conduct Authority, 12 Endeavour Square, London, E20 1JN.