In Newton’s latest DC column, Catherine Gill explores how master trusts can evolve their investment strategies against a changing backdrop
A growing number of people will reach retirement with only defined contribution pensions, many of them from master trusts. Against a changing and increasingly disruptive investment backdrop, the master trust industry will have a series of challenges to navigate in seeking to meet members' diverging requirements.
A key issue remains how to engage with members on their options - even at retirement. While some members with larger pots are exploring drawdown and annuity options, a high proportion of individuals currently choose to withdraw the cash and leave it in a low-earning bank account. There is an opportunity to do much more, for example by allocating to high yield and private credit, but fresh thinking will be required from the industry, alongside member education. Until now, master trusts have had a near-universal emphasis on lowering costs as a way to indicate value for money. A shift to focusing more on the best use of cost budget within the cap could encourage some badly needed innovation.
It will also be important for schemes to respond to the transitions taking place in economies and markets. After a very long bull market, fixed income investors now face the prospect of a more inflationary environment and rising yields. The transition to a low-carbon economy increases the potential for stranded assets, while Covid-19 has accelerated changes in consumer behaviours and has led to a greater focus on societal impacts.
All these disruptive elements suggest that care should be taken in holding legacy-based benchmarks. We believe an active investment approach, which looks for companies with the highest potential for improvement and innovative ideas, has a significant opportunity to add value.
In this context, the growing focus on environmental, social and governance (ESG) considerations and sustainability is particularly relevant. First, ESG analysis has a critical financial role in evaluating companies with the potential to suffer if they do not sufficiently address sustainability. But ESG issues are also of high interest to many members, and can be a potential engagement point in a way that finance typically is not. Younger cohorts may have a far greater desire for information and interaction as well as become more vocal on ESG expectations. While it is too early for clear answers, having distinct ESG positioning and strong reporting could become key differentiators for master trusts.
Catherine Gill is a member of the business development team at Newton Investment Management
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