The growing role of the master trust
Francesca Fabrizi meets Fiona Matthews, Managing Director of Towers Watson's UK DC master trust, LifeSight, to discuss the role that master trusts play in the market today, particularly around pension drawdown
What role do master trusts play in the industry today?
Master trusts really are going to be game changers in the market. We believe they are going to become the fastest growing way of providing DC pensions to members of the public. So companies are looking at how they can improve the quality of the pensions they provide to their DC employees and they recognise the increased burden of governance that is placed on them by the new regulations, particularly with the new flexibilities that were introduced – the pension freedoms that came in in April this year.
How has the industry taken on board the pensions freedoms?
The industry has probably been slow to adapt to the new flexibilities – we recognise that a fundamental change has been brought into the market and not everyone has had the chance to adapt and work out what members want for pensions; and providers still need to think about what it is they are going to be doing to meet that need. So our experience is that there is a big demand for people to take advantage of those new flexibilities and then there is an onus on companies to think about how they meet that demand and how they help people make informed decisions.
There have been so many master trusts introduced into the market – what are the aims and objectives of LifeSight and how does it differ to what’s already out there?
LifeSight is new, it is independently governed by an excellent governance group and it aims to game-change what people do with their pension provision. So through LifeSight we expect that members will get a high quality, lower risk and cost effective pension which really motivates people to engage fully in their pension and through engaging in their pension to really improve the outcomes for pensions. So we all recognise DC pensions can be boring, people don’t really engage in it, so there is a real opportunity to address some of the challenges that providers and employers are faced with looking at DC pension provision.
When did LifeSight launch?
We launched in June so it is still early days, but we are already talking to about 50 different companies who want to do something different with their pensions, to address the challenges of the new regulations, the governance burden, and looking at how they can really communicate and engage with their employees about their pension provision.
Are many employees looking at master trusts as a way of offering drawdown to their employees?
Absolutely – the majority of trust-based schemes that we talk to do not want to do drawdown in their schemes but they recognise that there is a big need for their employees; and so employers want to find something that is simple, is intuitive, is high quality and it helps the majority of people to make simple decisions about how they want to draw their money down. So, it is easily accessible, it has low charges, and it doesn’t require the people using it to be sophisticated investors.
Has there been an influx of people actually drawing down their pensions?
Our experience to date is that very few have actually introduced drawdown so far – those that have taken the cash out have used it by cashing out their pension, so taking it as a single lump sum, and that is probably from the pent-up demand from 2014, when the flexibilities were introduced.
How important is the assurance framework around master trusts?
We think the assurance framework is really important – every master trust should have a master trust assurance framework and should also have the NAPF’s PQM READY mark, because it shows that it is durable, it is scalable, it really is well governed and it has member interests at the heart with very strong effective communications. At the end of the day communication is absolutely key to helping people engage and make informed decisions. So having that assurance framework really is important and that should be a fundamental base for any master trust that is serious in this new market.
How does LifeSight make that communication point a key feature?
LifeSight is putting the member at the heart of everything that we are doing, so the communication is really engaging. What we have recognised from consumer research that we have done is that people find pensions boring and we need to find a way to really engage them in their pension so what we are looking to do is really help them understand the age at which they can afford to retire, so rather than say: “By this age you will have this much money”, which doesn’t really mean anything, we will say: “The amount you saved and are carrying on saving means that you can retire at the age of 72”, which really focuses people’s minds. So we can individually calculate the age at which each person can afford to retire and then help them think about simple steps they can take today that will bring down the age to something that is more in line with their expectations.
Will the new pension freedoms make pensions a more exciting topic for the younger generation?
We have done a lot of research into members’ thoughts around the new flexibilities and pension freedoms and we found the under 35s are really engaged in pensions. They are keen to understand more, they want to understand more, they want to engage, and they want to save so that’s a really good message – and an open door that employers can push at to engage a younger workforce in pension provision at a time that they need to start saving . We ought to take advantage of that opportunity.
There have been so many master trusts launched – are you expecting consolidation in the market?
We fully expect only the strongest master trusts to survive and there to be significant consolidation in the market. A number of master trusts will find that the increased burden of regulation and the high quality which needs to be addressed if we are going to have members’ money safe with high quality trustee boards governing those members’ interests there can only be consolidation in the market and we think that is something that should be embraced earlier rather than later so we are all driving for higher standards and also better quality outcomes for members. At the end of the day this is about people’s money, this is about people’s retirement – we have to get that quality right and be proud of what we are doing and we have got a real opportunity here for change and to make that work.
What is the general sentiment among clients post pension freedoms being introduced?
The majority of our clients see the pension reforms as a really great opportunity for the British public to have a lot more flexibility in what they do with their pension pot and they see the need for that; so nine out of ten employers that we have spoken to are seeing this as a great opportunity, not just because it gives the new freedom for people to spend their money how they wish to but also because it is a new opportunity to really engage people in pensions and encourage people to save more in pensions - at the end of the day that benefits everybody. If people save more in their pensions, they can afford to retire earlier, that helps employers by not having an ageing workforce, and it also means people can afford to enjoy their retirement and that is something we should all be passionate about.
What advice would you give to employers who are thinking about outsourcing their DC arrangements to a master trust?
Employers need to do their due diligence if they are looking to outsource their pension arrangements. So they need to make sure they have got a really high calibre trustee board, who are still looking after members’ interests. We passionately believe trust is best in an outsourced master trust so you have got the member alignment at the heart. Looking at the quality of the communications, how the engagement works, how personalised that engagement is is also very important. Then there is the value for money point - are you really assured that the investment choices which are provided are simple, are intuitive, and easy for members to pick from, so there are a number of things which I think employers need to look at. So the quality of assurance and governance, the quality of the communications and the way in which members are engaged as well as looking at the quality of the investments which back members’ outcomes being right.
