Cover story – Defined contribution
Since the introduction of automatic enrolment 10 years ago, the defined contribution (DC) market has grown rapidly. Today it manages close to £500bn in assets for more than 20 million members, or two-thirds of the UK workforce, according to The Pensions Regulator (TPR).
Although far behind the £1.6trn managed by defined benefit (DB) schemes, the market is expected to continue closing this gap. The Financial Conduct Authority (FCA) predicts that dur- ing the next decade assets managed by DC schemes could be worth more than £1trn. And master trusts are at the heart of this growing market with 84% of UK employers selecting such an option. But because most workers are being enrolled automatically, many might not know that they are responsible for their own retirement savings. This is highlighted through more than 90% of such savers being invested in a default fund, where the investment decisions are made without their knowledge. Moreover, with automatic contributions being set low, most will have insufficient retirement savings. This means that most DC investments tend to be skewed towards growth assets. Combined with a strong focus on man- aging costs and having daily liquidity, passively managed index funds in developed market stocks appear to be the weapon of choice for stakeholder pension investors. So far, this will have stood them in good stead. The introduc- tion of automatic enrolment coincided with almost a decade- long bull market for growth stocks and as a result, many DC default funds have booked double-digit returns, on par with the average hedge fund performance. But the global economy is facing dramatic changes. For the first time in more than a decade, inflation is on the rise and central banks are signalling that they will lift interest rates, with potentially severe repercussions for growth stocks. portfolio institutional has mapped the rapidly changing land- scape of the biggest master trust providers and quizzed them how they plan to adapt their investment strategy to these new macro-economic challenges.
A nation of master trusts Since the introduction of auto enrolment in 2012, the DC mar- ket has evolved rapidly.
A decade into the enrolment process, master trusts are rapidly emerging as the dominant form of workplace pension provi- sion. Since the introduction of TPR approval process for mas- ter trusts in 2019, 36 providers have emerged, collectively man- aging more than £200bn in assets for more than 20.7 million members, meaning that the majority of workplace pension scheme members are now enrolled with a master trust. For Maria Nazarova-Doyle, head of pension investments at Scottish Widows, the handful of master trusts that will evolve
22 | portfolio institutional | March 2022 | issue 111
as the dominant players will define the future of DC investing. “We are becoming a nation of master trusts, a bit like Australia with their superannuation funds. That is what the landscape is going to look like in just a few short years,” she adds. “Instead of a landscape with lots and lots of corporates all set- ting up their own pension scheme, they are now giving it all up and moving to master trusts because it is too costly. “And the government is pushing that consolidation because they would rather have several large professionally-run master trusts with all the resources, economies of scale and profes- sional boards,” she adds. For Steve Charlton, managing director of DC at SEI, scale is a factor in the growth in assets managed by master trusts. “Mas- ter trusts will become the biggest providers in the DC market,” he adds. “A lot of smaller providers will look at themselves and realise that they are simply not able to provide the best value for money within the structures they have.”
Wild west
When the government introduced auto enrolment, it intro- duced a charge cap that limited the amount of DC providers can charge members. This in turn has shaped the focus on pro- viding cost-effective investment strategies. But the main reason for the attempts to keep costs low is not the charge cap, but competition, argues Daniela Silcock, head of pol- icy research at the Pensions Policy Institute (PPI). “The charge cap plays a role, but it is more in terms of having led to the crea- tion of an environment where everyone is competing on cost.
We are becoming a nation of master trusts, a bit like Australia with their superannuation funds. That is what the landscape is going to look like in just a
few short years. Maria Nazarova-Doyle, Scottish Widows
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