How do master trusts add value for members at retirement?

I shouldn’t be surprised to report on a consultancy looking at how member outcomes could be improved by picking the right workplace pension. But I am.

This morning at 11 am, Hymans Robertson are kicking off another round of webinars showcasing the various options open to employers choosing where their and their staff’s money is invested to maximise lifetime income in retirement.

I’m very pleased that I’ll be on these seminars , giving my views and helping keep the focus on what really matters- the value members get from schemes. This blog offers my view of the progress made in assessing value in workplace pensions and especially in master trusts.

At the very outset of auto-enrolment, large employers used firms like Hymans Robertson to choose their workplace pension. These included employers like Marks & Spencers, Tescos and Asda – companies with the resource to make sure the solution was right for them. This often meant bespoke solutions focussing on self-managed investment options (Tesco still manage the default fund in its sections of the two L&G master trusts.

But that didn’t last long. Pretty soon it became obvious that for most employers, investment , advice and member outcomes were a long way down the list of priorities.

Why did employers fall in love with master trusts?

From the initial advertising of workplace pensions during the 2012-18 staging period, you’d be forgiven for thinking that choices were primarily taken on the capacity of a workplace pension to integrate to an employer’s payroll and ensure that contributions were collected in compliance with tPR’s directives. Not all providers got this right but that didn’t stop NOW pensions amassing over 2m member accounts, simply by insisting that their systems worked (they often didn’t).

Like Nest, People’s , Smart and a number of smaller master trusts, NOW captured the support of accountants and their payroll bureaux, who were able to operate auto-enrolment with no upfront charge to the employer and with the promise of a fully automated process and no need for a financial advisor.

Master trusts offered employers the chance to set up auto-enrolment through payroll without the need for a financial advisor and this saved them a lot of money. Once it became apparent that master trusts were offering AE compliance, the selection of workplace pension provider became a part of a process in which member outcomes were a very low priority.

Because Group Personal Pensions were marketed through advisors, they were relatively unpopular in the staging of auto-enrolment.  The vast majority of employers plumped to participate in master trusts, where there was no need for advice.  Without the capacity to be paid by commission or consultancy charging, advisors became progressively less important as employers staging increased, and resource for advice decreased.

What happens when you forget about outcomes…

Master trusts were quite happy to play down investment considerations , not least because accountants were not generally authorised to give investment advice.

The key players between 2012  and 2018 did not promote themselves as providing good  pension outcomes,  as a result, organisations which are best forgotten such as Friendly Pensions, got a foothold in the market. Thankfully – good regulation (and Smart Pensions) saved a lot of employers and their staff from some poor outcomes from Friendly Pensions and a few other rogue master trusts.

TPR creates an orderly market

The early years of auto-enrolment staging were “wild-west” and had little to do with pensions.

It wasn’t until the introduction of the Master Trust Assurance Framework in October 2018, that a proper system for protecting members was put in place by the Pensions Regulator. Since then, master trusts have consolidated with each other so that now there are (in Hymans view) around 20 viable choices for employers looking to invest their auto-enrolment contributions.

As asset balances have increased, the means of assessing “value” has become more sophisticated. The initial criteria – AE compliance and the cost of integration to employers, has now developed into closer scrutiny, firstly of what members are actually paying for the services they are getting and more recently, what members are actually getting by way of an investment return – and why

Indeed, the cost to employers of AE compliance is now a relatively minor consideration for larger employers.

I think it’s generally accepted that the two things that shape a good member outcome in a workplace pension are adequate contributions and good investment performance. The sooner you get your contributions in , the easier it is to pick up the benefit of good investment returns.

So value for money assessments have focussed on the soft factors that attract employee contributions – attractive investment strategies, engaging communications and easy access to technology that can help you see and manage what’s going on. Collectively we can call these “quality of service”, while they don’t in themselves improve outcomes, they make it easier for us to pay attention to our pension , which should lead to us investing more – earlier. Focussing on these soft factors has been easy for those charged with value assessments as they are subjective, so less easy to challenge and because they make it easy for fiduciaries (IGCs and Trustees) to talk to what matters to providers – increasing contributions.

But Hymans, and other progressive consultancies have accepted that the impact of “quality of service” is limited, most people contribute the bare minimum they have to workplace pensions whether service is good or bad, not least because auto-enrolment is a “disengaged” process.

Members do engage when they can get their money back!

You can understand why most people don’t bother much about pensions if they are saving into a workplace pension.  They’ve got a pension which is more than they used to have and more than many people who they know who aren’t “workers”.

However, we are now reaching a point where many “savers” are at or beyond the minimum retirement age to start spending the saving. For them – pensions are very real and they’re fast becoming their biggest source of available cash. At a time when money is in short supply, master trusts are becoming increasingly important.

Workplace pensions , when they become “spendable” , become a lot more important to savers, they start becoming “their money” rather than the money they’ve paid to other people. This is why the emphasis consultants place on the “at and in retirement” capacity of a workplace pension to pay-out, is becoming critical to an assessment of member value.

Measuring a master trust’s capacity to meet the upcoming demand for the payment of savings will become a key part of “employer choice” of workplace pension provider.

Rear-view mirror stuff.

The last seven years have seen Independent Governance Committees and Trustees emphasising the importance of quality of service and downplaying the investment returns being received by members which are often dismissed as “rear-view mirror stuff”. It’s true that if you are picking a new workplace pension provider, it’s what happens in future to member’s money that matters – not what’s happened in the past. But that doesn’t make a rear-view mirror an important feature of a car – or an investment decision.

What’s happened in the past talks to us both of the skill of a workplace pension provider to get it right on the actual (nominal) return, but also their skill in achieving these returns without taking excessive risk (risk-adjusted return).

Actually, the rear-view mirror can tell us where managers drove well and where they drove badly and finding pension providers that are consistently in the game and providing good risk adjusted performance is critical to benchmarking one provider against another.

Providers are understandably nervous about a “rear-view” mirror approach, but the more developed consumer market in Australia, suggests that this is how most providers will eventually be judged by those who choose their products.

Hymans Robertson’ progressive view on DC performance reporting

The reason I am speaking on Hymans Robertson’s webinars is because I share their view of the need to improve quality of service to increase contributions and particularly to help people spend their savings wisely. It’s also because I share the view of its DC investment consultancy that we cannot go on allowing performance to be reported in an abstract way based on “net performance ” tables. If we are going to have rear-view mirror metrics, they have to record what actually happened to members , not what numbers reported by the investment managers say should have happened.

Defined benefit schemes could use the Combined Actuarial Performance Statistics (CAPS) tables top compare funds because DB scheme management was not about member outcomes but about long-term management of the scheme funding. But I share with Hymans a concern that the net performance tables being forced on trustees and employers to assess DC value for members is not fit for the purpose of measuring member’s actual experience, which is subject to completely different risks and rewards to the defined benefit scheme.

So we are working towards a new means of benchmarking member outcomes, based on the experience of members within the scheme, rather than on net performance tables.

Please come to these Hymans Robertson Seminars.

There are two seminars – one today (Monday 13th June) at 11 am featuring Nest,Aviva and HSBC as well as Kate Smith, Roger Breedon and myself.

The other is at 11.30 am tomorrow (Tuesday 14th June) and features L&G and Cushon. Both will be led by my friends Michael Ambery and Shabna Islam of Hymans Robertson.

You can register for these webinars on this link

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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1 Response to How do master trusts add value for members at retirement?

  1. Five principles. How much you save, how long you save, costs and whether your provider is still going to be around when you retire. And down the list investment performance. Over a 20 year period investment returns will be much of a muchness whoever you choose . Low cost and a big name – easy. At least auto enrolment has ensured that they actually do it for a long period. But most people don’t follow the first principle – they save too little. The current trend to take early retirement in the 50s just because savers are mesmerised by a sum they never believed they would have will result in many running out of money by the time they are 70 with another 20 years to go, but 20 years is far beyond most politicians’ vision. The taxpayer will ultimately foot the bill.

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