Master Trust Market Insight

Transcription

1 Aon Defined Contribution Delegated Services Master Trust Market Insight February 2017 Risk. Reinsurance. Human Resources.

2 Introduction In the past five years the UK s pension landscape appears to have embraced the old adage that 'the only constant is change'. While the goal of achieving the best possible member outcomes has remained, with almost annual changes to regulation and pension options, it s starting to feel like the playing field is continually shifting underfoot. The government has introduced auto-enrolment, more defined contribution (DC) scheme governance requirements, charge caps and new pension freedoms, with the stated intention of helping individual members find their unique path to the best possible retirement outcomes. While the intentions appear good and the theory seems sound increasing options can generally lead to greater opportunity these actions have also led to governance, investment and administrative challenges. And, for trustbased schemes, it has led to financial pressures and difficulties associated with greater choice for members. It is against this backdrop that master trusts are emerging as a stable vehicle for DC provision and are increasing in popularity. And, why not? Master trusts offer a compelling combination of professional governance and administration, investment options, improved member engagement tools, flexibility, and communication for members thanks, in part, to embracing new technology. They also use economies of scale to help keep costs down. But, with over 100 master trusts now in existence in the UK, there is increasing focus on the sustainability of the market. Many expect a period of consolidation in the coming years, which poses questions around the security of members benefits. Governance of master trusts is under scrutiny, too. It is therefore no surprise that the government has proposed new legislation covering the authorisation and supervision of master trusts in the recent Pension Schemes Bill. In light of all this, Aon undertook a survey of over 130 pension trustees, managers and employers to gain a better understanding of what they see as the benefits, challenges and opportunities of master trusts. By really understanding the wants and needs of those considering a master trust, we can make certain that the market evolves so that today s DC savers are well positioned for positive retirement outcomes in future. We hope that you will agree that this is a timely report, providing some helpful insights and analysis. If you would like to discuss the findings in more detail, please get in touch. Tony Britton Head of Aon Delegated DC Services tony.britton@aonhewitt.com +44 (0) Milan Makhecha Principal Consultant milan.makhecha@aonhewitt.com +44 (0)

3 1. Growth in popularity of master trusts Some estimates indicate that there are over 100 master trusts in the market today. Aon research* found that within five years, master trusts could make up 13% of the DC pensions market, accounting for 70 billion in assets. Results of this survey seem to support these claims, with 55% of respondents planning to use master trusts for at least some part of their DC workforce within the next five years, compared to only 37% of respondents that are using them today. (Chart 1) Within five years, master trusts could make up 13% of the DC pensions market, accounting for 70 billion in assets Chart 1: How much do master trusts feature in your current and future plans? Q Now Q In 5 years Use a master trust for part of DC workforce Use a master trust for all or part of DC workforce Do not use master trusts DB only Do not use master trusts GPP only Do not use master trusts own DC trust-based scheme 17% 34% 20% 21% 24% 20% 20% 18% 38% 25% 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% With the clear and sudden increase in the popularity of master trusts it is worth asking why this has happened. Throughout the survey our respondents consistently cited a shift to professional governance as one of the most attractive elements of moving to master trusts, and considered cost and quality as key to choosing between them. They also saw master trusts' potential to engage members through the latest technology as a promising sign for the future. Respondents list a shift to professional oversight as the most attractive aspects of master trusts The introduction of auto-enrolment by the Pensions Act 2008, and its implementation since 1 January 2012, has led employers into a whole new world of responsibility and administration requirements. Add to this the pressures of increased governance requirements laid down by the Pensions Regulator (tpr) and the challenge of delivering this within a charge cap and it is no surprise to see our respondents list a shift to professional oversight as the one of the most attractive aspects of master trusts. * Aon Defined Contribution DC Survey 2015 Aon 3

4 We asked respondents what they thought were the most important aspects of master trusts that make them attractive. The two options regarding a shift in governance introducing professional governance and the reduction of company/own trustee governance were each chosen almost twice as often as the third most popular choice. (Chart 2) Chart 2: What do you think are the most important aspects of master trusts that make them attractive? (Tick top three) Professional governance 75% Reduced company/own trustee governance 75% Ability to consolidate legacy plans 40% Set up to accept all members 38% Ability to offer decumulation solutions inside product 36% 0% 10% 20% 30% 40% 50% 60% 70% 80% Overall, the governance aspects of master trusts make them very attractive. However, when considering different master trusts, a range of features were considered important. These include charges, the quality of investment offerings, administration and the quality of communication, education and support available to members. We discuss these in more detail in Section 3 'Selecting a master trust: what is important?' (page 7) of this report. When considering different master trusts, then a range of features were important including charges, the quality of investment offerings, administration and the quality of communication, education and support available to members 4 Master Trust Market Insight

5 2. Increasing concerns Too many master trusts Chart 3: Are there too many master trusts? It is not all unfettered optimism, however. It is difficult to imagine a scenario where 100-plus master trusts can survive. We asked survey participants if they thought there were currently too many master trusts. 72% of them answered yes. 57% cited a reduction in pension confidence after the inevitable discontinuance of some master trusts as part of their concern. (Chart 3) No, more choice is better 23% Other 5% Yes, it makes choosing too confusing 15% Yes, when some fail it will reduce confidence in pensions 57% Survivorship For those with a master trust, when asked how concerned they were for their particular arrangement, given that some might discontinue, 45% held no strong view and 38% were confident that their own master trust would survive even if the sector were to shrink in the future. (Chart 4) Chart 4: What are your views on survivorship in the context of your current / future pension provision? This concern prevents me from considering master trusts 10% Other 7% I feel confident my master trust would still be around even if the sector shrinks 38% No strong view 45% Aon 5

6 Greater protections However, these concerns are being addressed. The recent Pension Schemes Bill featured an authorisation and supervisory regime, or 'greater protections' for master trusts. What exactly this will involve is yet to be seen but our respondents who share in these concerns had some ideas (their responses were provided before the Pension Schemes Bill was published). (Chart 5) Chart 5: What form would you like 'greater protections' to take in master trusts? Higher governance standards 22% Other 4% Holding capital to cover future events 13% Holding assets in escrow or similar to meet costs of exit 13% Interestingly, this provided one of the most evenly split set of responses in the whole survey, with higher governance standards and regulation by the FCA the slightly more popular options. The Pension Schemes Bill will go some way to addressing these varied concerns, but perhaps not all. A levy on all master trusts to a central fund to pay out when or if a master trust fails 12% Regulation by the FCA, not TPR 21% A living will setting out how members will be protected on exit 15% Managing conflicts True to the spirit of the current pension climate, most of our respondents wanted to explore all the options and pick the best trust for them. This was evident in the fact that 48% of them declared they would seek out a number of consultancies and undergo a tendering process when looking to appoint a master trust. (Chart 6) They were also keen to keep it all above board, with 83% having concerns around potential conflicts of interest if they were approached by their existing consultancy. However, it is worth noting from our prespective that 53% of respondents would simply need reassurance about how the conflicts are managed. Most of our respondents wanted to explore all the options and pick the best trust for them Chart 6: If you were looking to appoint a master trust, where would you start your search? The pensions media 2% Third party evaluator 13% Other 4% Would approach a number of consultancies to tender for selection 48% Your existing scheme provider 10% Your existing DC benefit consultant 21% 6 Master Trust Market Insight

7 3. Selecting a master trust: what is important? Holding in one hand the optimism and attractiveness of master trusts, and in the other concerns over their ability to survive, the survey asked respondents what aspects they considered important when choosing between different master trusts. (Chart 8) Five primary areas for consideration emerged: charges (73%) and investment offerings (72%) topped the list respectively, followed by the quality of administrative services (65%), the quality of communications, education and support offered to members (65%) and the quality of governance / trustees in place (63%). Chart 8: If you were choosing between different master trusts, what are the most important aspects? (Tick top five) Charges 73% Quality of investment offering 72% Quality of administrative services 65% Quality of communications, education and support offered to members including technology 65% Quality of governance/master trustees 62% Trust in the provider/ brand/reputation/durability of provider 43% Quality of ongoing client service and support 26% Ease of use/saving of management time 24% Quality of in-built decumulation service 18% Quality marks - such as AAF or PLSA 16% 0% 10% 20% 30% 40% 50% 60% 70% 80% Aon 7

8 Charges While we see an unsurprising focus on charges, it is encouraging to see the quality of the solution provided by the master trust ranks nearly as highly. Offering charge-cap compliant and competitive charges is clearly important for members. Add to this the level of competition in the master trust market, and there is good value to be secured for members through a master trust arrangement. However, it is equally important to provide a robust investment solution to help deliver good member outcomes, and ideally one that offers a degree of future-proofing to stand the test of time as regulations, markets and products change. The emphasis on administration services and communication also highlights that these are seen as key to provide a quality, good value DC scheme. Quality of investment offering Being able to offer a future-proofed default strategy was also seen as important; this helps to ensure that changes to the default can be implemented easily and efficiently and is something that master trust should be well placed to deliver. Interestingly, respondents placed less emphasis on low investment charges as a must have, preferring to be able to offer members investment strategies that incorporate best ideas and active management. And finally, there is a clear message that offering a very large number of funds is not important. (Chart 9) Simplicity of communicating investment fund range to members' was considered important Chart 9: In order to generate good member outcomes within a master trust, which elements of investment design / strategy do you believe are important? Simplicity of communicating investment fund range to members 80% A future-proofed default strategy 73% Ease of switching between funds 70% Access to funds which incorporate best ideas for DC investing Inclusion of active management, where it adds value, within the default strategy 66% 52% A future-proofed range of funds 44% Low investment charges, even at the expense of potentially better outcomes Ability to access the same fund range before and after retirement Inclusion of environment, social and governance factors within the strategy design Access to a very wide fund range - the number of funds matters more than the quality Access to individual managers including retail names 42% 38% 31% 15% 10% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 8 Master Trust Market Insight

9 Quality of communications, education and support offered to members 89% of respondents believe that their members had limited or no interest in the structure of their DC arrangement. (Chart 10) Clearly, member engagement remains an issue so it is little wonder it is ranked in the top five of important aspects of differentiating between master trusts. Master trusts offer strong potential to solve the engagement problem and member retirement outcomes. Some of this potential comes from the structure of the arrangement, but our respondents said that the keys to their success are the effectiveness of their design and use of technology to communicate with members. Respondents were almost unanimous in considering technology within the design of a master trust as either 'important' or 'very important'. Almost half of them reported that it would be a 'key part' of their decision making. (Chart 11) Chart 10: How much interest do you believe your members have in the structure of their DC arrangement (Trust-based, master trust, GPP etc)? No interest 28% Other 1% Interested and aware of the differences 10% Respondents were almost unanimous in considering technology within the design of a master trust as either 'important' or 'very important' Limited interest 61% Chart 11: In your view, how important is technology within the design of a master trust? Very important The technology embedded within a master trust is a key part of my decision 48% Important Not important I would consider technology amongst a range of other factors The technology available would not influence my decision 49% 3% 0% 10% 20% 30% 40% 50% Aon 9

10 The results were similarly conclusive when discussing the effectiveness of technology. (Chart 12) Almost every area scored well but technology was highlighted most as an effective means of ongoing communication and giving members access to up-to-date account information. Technology was highlighted most as an effective means of ongoing communication and giving members access to up-to-date account information Chart 12: In selecting a master trust and being able to ensure good member engagement, how effective do you think technology is in each of the following areas? Enabling members to access up-to-date information about their account As a portal for ongoing, routine scheme communication 86% 82% Access to pension planning tools 74% Enabling members to carry out transaction activity eg. to switch funds 73% Provision of educational material around pensions 62% Delivering reminders / wake-up calls 51% Wealth aggregation tool to facilitate pension planning / budgeting 39% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Governance Given that respondents had already cited professional governance as one of the most attractive elements of master trusts, it is not surprising that 56% of respondents considered it important that the master trust trustee board includes at least one independent, professional trustee. What is perhaps more surprising is that as many as 40% considered it very important that independent trustees make up the entire board. (Chart 13) 56% of respondents considered it important that the master trust trustee board includes at least one independent, professional trustee Chart 13: How important do you believe it is that the master trust trustee board includes independent, professional trustees? Very important All members of the master trust trustee board should be independent trustees 40% Not important The master trust trustee board does not need to include any independent trustee members 4% Important At least one member of the master trust trustee board should be an independent professional trustee 56% 10 Master Trust Market Insight

11 Conclusion Respondents to our survey believe that 89% of their members have limited or no interest in the structure of their DC provision, indicating that members rely on their employer to select the right structure. This goes hand in hand with the results of Aon's 2016 DC Member Survey, which suggests that members trust their employer when it comes to pensions. Yet, the government's recent attempts to improve retirement outcomes for scheme members via automatic enrolment, more DC options, charge caps and new pension freedoms have introduced new pressures for employers. Many believe that master trusts can help alleviate these pressures. They combine professional governance, administration, and quality investment offerings as well as the potential to increase member engagement. Many also believe that master trusts could help address this issue of member engagement by focusing on their use of technology to communicate with members. By incorporating the latest technology, master trusts have the ability to become the desired DC option for many schemes which want to take advantage of their economies of scale, increased governance and administration. Contact Tony Britton Head of Aon Delegated DC Services +44 (0) aonhewitt.com Milan Makhecha Principal Consultant +44 (0) aonhewitt.com While there are inevitable challenges and changes ahead who will survive; what form 'greater protections' will take all the signs, including the results of this survey, point to master trusts holding an increasingly important place in the provision of DC retirement savings in future. Aon 11

12 About Aon Hewitt Aon Hewitt empowers organizations and individuals to secure a better future through innovative talent, retirement and health solutions. We advise, design and execute a wide range of solutions that enable clients to cultivate talent to drive organizational and personal performance and growth, navigate retirement risk while providing new levels of financial security, and redefine health solutions for greater choice, affordability and wellness. Aon Hewitt is a global leader in human resource solutions, with over 35,000 professionals in 90 countries serving more than 20,000 clients worldwide. For more information on Aon Hewitt, please visit: aonhewitt.com Follow Aon on Twitter: twitter.com/aon_plc Sign up for News Alerts: About Aon Aon plc (NYSE:AON) is a leading global provider of risk management, insurance brokerage and reinsurance brokerage, and human resources solutions and outsourcing services. Through its more than 72,000 colleagues worldwide, Aon unites to empower results for clients in over 120 countries via innovative risk and people solutions. For further information on our capabilities and to learn how we empower results for clients, please visit: Aon plc All rights reserved. The information contained herein and the statements expressed are of a general nature and are not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information and use sources we consider reliable, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. Aon Hewitt Limited is authorised and regulated by the Financial Conduct Authority. Registered in England & Wales. Registered No: Registered Office: The Aon Centre The Leadenhall Building 122 Leadenhall Street London EC3V 4AN Risk. Reinsurance. Human Resources.