Welcome to the jungle
Paul EnderbySenior Vice PresidentDefined Contribution
Find me on LinkedIn
The recent acquisition of several master trusts by competitors is probably the start of the long-heralded consolidation of the market.
Will it consolidate further or settle down? At this point it’s hard to say, but the ‘jungle’ that is the master trust landscape may become more complex to navigate. Recent developments present several considerations for sponsoring employers looking to select a provider.
Choosing a master trust is not as simple as avoiding the smaller, weaker ‘prey’ but also perhaps thinking carefully about the ‘predators’ and the ‘big beasts’.
Administration – beware the next best thingI’ll come on to investment, but let’s begin with an often-under-estimated consideration and one that’s critical for DC in a consolidating market: administration.
Key questions here include: which platform and/or administrator will be used post-merger? Where will clients be serviced from? How will scheme-specific knowledge be retained in the event of changes?
And what of the future when further acquisitions are made? With several master trusts are growing by acquisition, it’s very important to understand the acquirer’s plans to ensure your members don’t suffer the side effects from any indigestion when administration is combined.
Will the same platform and administrator be used, or will the newly acquired master trust come with something more modern to which everything will be transferred?
Again, that loss of knowledge along the journey poses a risk to the experience members receive, which will be one of the key pillars of the new VFM Framework.
Investment – lumbering giants or agile hunters?Whilst more assets should in theory allow opportunity to offer sophisticated investments, scale doesn’t always equate to investment sophistication.
Some of the largest master trusts such as NEST are being very thoughtful in their thinking, and agile in their execution. Equally, some smaller master trusts are also taking the opportunity to demonstrate the same qualities across their investment proposition.
Others could be perceived as being slower to anticipate, innovate and execute. Now, this may sound unfair, as change can be an awful lot more complex for provider master trusts – but given their scale and market share, investment really counts for an awful lot of employers and their members.
Giving clients confidence that default strategy reviews really will move the dial – perhaps coupled with a dose of magnanimity about past strategies – would, in my view, be welcome.
Either way, clear evidence of innovation, agility and skillful investment execution are things to look for when selecting a master trust. When the new VFM Framework is in force, and with investment performance playing a much stronger role, that evidence will become much clearer.
Redington’s approach is to start where you want to end up. As a sponsoring employer it’s therefore critical to think about what you want your master trust to deliver.
While each sponsor will have different objectives, the following questions are a good starting point for all:
Do you want all those people who stay with you to be able to retire at the right time for you and your business?
If it’s more about attracting and retaining people who may not stay with you until retirement, how big a part of your reward package are pension contributions?
In either case, do you want your people to grow the value of those contributions as best they can when they are with you, and whilst they still have time to absorb some losses?
If contributions can’t be as high as may be ideal, your master trust is going to have to deliver great investment performance to give your members a chance. So future expected returns should be the most important feature you look for. Controversially, perhaps in future it will be more important than administration, communications and charges.
Personally, I think it’s a simple approach that can help employers see the wood for the, well... jungle.