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Master Trust Market InsightFebruary 2017
AonDefined Contribution | Delegated Services
Risk. Reinsurance. Human Resources.
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 trust-
based 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 [email protected] +44 (0)20 7086 2979
Milan Makhecha Principal [email protected] +44 (0)20 7086 8292
Aon 3
1. Growth in popularity of master trusts
0% 5% 10% 15% 20% 25% 30% 35% 40% 45%
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)
Use a master trust for part of DC workforce 17% 34%
Use a master trust for all or part of DC workforce 20% 21%
Do not use master trusts — DB only 24% 20%
Do not use master trusts — GPP only 20% 18%
Do not use master trusts — own DC trust-based scheme 38% 25%
Q Now Q In 5 years
Chart 1: How much do master trusts feature in your current and future plans?
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.
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.
Within five years, master trusts could make up 13% of the DC pensions market, accounting for £70 billion in assets
Respondents list a shift to professional oversight as the most attractive aspects of master trusts
* Aon Defined Contribution DC Survey 2015
4 Master Trust Market Insight
0% 10% 20% 30% 40% 50% 60% 70% 80%
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%
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.
Chart 2: What do you think are the most important aspects of master trusts that make them attractive? (Tick top three)
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
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)
Aon 5
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)
Chart 4: What are your views on survivorship in the context of your current / future pension provision?
Chart 3: Are there too many master trusts?
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)
Other 5%
Other 7%
No, more choice is better 23%
This concern prevents me from considering master trusts 10%
Yes, when some fail it will reduce confidence in pensions 57%
No strong view 45%
Yes, it makes choosing too confusing 15%
I feel confident my master trust would still be around even if the sector shrinks 38%
2. Increasing concerns
6 Master Trust Market Insight
Chart 5: What form would you like 'greater protections' to take in master trusts?
Chart 6: If you were looking to appoint a master trust, where would you start your search?
Other 4%
Other 4%
Regulation by the FCA, not TPR 21%
Would approach a number of consultancies to tender for selection 48%
Higher governance standards 22%
Third party evaluator 13%
The pensions media 2%
A levy on all master trusts to a central fund to pay out when or if a master trust fails 12%
Holding assets in escrow or similar to meet costs of exit 13%
Your existing DC benefit consultant 21%
A living will setting out how members will be protected on exit 15%
Holding capital to cover future events 13%
Your existing scheme provider 10%
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)
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.
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
Aon 7
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%).
0% 10% 20% 30% 40% 50% 60% 70% 80%
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%
Chart 8: If you were choosing between different master trusts, what are the most important aspects? (Tick top five)
3. Selecting a master trust: what is important?
8 Master Trust Market Insight
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
0% 10% 20% 30% 40% 50% 60% 70% 80% 90%
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 66%
Inclusion of active management, where it adds value, within the default strategy 52%
A future-proofed range of funds 44%
Low investment charges, even at the expense of potentially better outcomes 42%
Ability to access the same fund range before and after retirement 38%
Inclusion of environment, social and governance factors within the strategy design 31%
Access to a very wide fund range - the number of funds matters more than the quality 15%
Access to individual managers including retail names 10%
Chart 9: In order to generate good member outcomes within a master trust, which elements of investment design / strategy do you believe are important?
Aon 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)?
Other 1%
No interest 28%
Limited interest 61%
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'
0% 10% 20% 30% 40% 50%
Very important
The technology embedded within a master trust is a key part of my decision 48%
Important
I would consider technology amongst a range of other factors 49%
Not important The technology available would not influence my decision 3%
Chart 11: In your view, how important is technology within the design of a master trust?
10 Master Trust Market Insight
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
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Enabling members to access up-to-date information about their account 86%
As a portal for ongoing, routine scheme communication 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%
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?
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)
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%
Important At least one member of the master trust trustee board should be an independent professional trustee 56%
Not important The master trust trustee board does not need to include any independent trustee members 4%
56% of respondents considered it important that the master trust trustee board includes at least one independent, professional trustee
Aon 11
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.
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.
Contact Tony BrittonHead of Aon Delegated DC Services +44 (0)20 7086 [email protected]
Milan Makhecha Principal Consultant+44 (0)20 7086 8292 [email protected]
Conclusion
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© Aon plc 2017. All rights reserved.The information contained herein and the statements expressed are of
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No one should act on such information without appropriate profes-
sional advice after a thorough examination of the particular situation.
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