Spence Johnson executives expect master trusts to “be a very important part of the market in 10 years,” he said. U.K. master trusts account for about £6 billion of a £300 billion total DC market. In 2025, the firm expects master trusts to account for about one-third of what is expected to be a £1 trillion DC market.
Providers are also watching the development of the U.K. DC market closely, and are aware of the disparity in target-date popularity. “The TDF industry blossomed in the U.S. following the Pension Protection Act in 2006,” said Paul Farrell, London-based U.K. head of institutional at J.P. Morgan Asset Management. “Most companies' default arrangement prior to (the) early 2000s was to hold corporate stock or cash, but the act provided certain default arrangements, including target-date funds, with safe harbor” as qualified default investment alternatives. The QDIA regulation allowed DC plan executives to choose default options without fear of being sued, he said.
“In the U.K., insurance companies have always had the monopoly when providing pensions to DC plans and individuals, and have used lifecycle structures to do this,” Mr. Farrell said. “A managed account would be the most akin to a lifecycle in the U.S. but they have not seen as broad adoption as TDFs, often due to costs.”
Mr. Farrell also cited the rise of the master trust — as well as the U.K. being in the late stages of a multiyear regulatory-led effort to automatically enroll qualified employees into a workplace retirement plan — as an opportunity for target-date funds. “Now that we are getting toward the tail-end of auto enrollment, we are finding that trustees are starting to look at investment more closely and to question the performance of their default arrangements. This is where we are really starting to see TDFs step into the foreground — there is a realization that generally, the performance of lifecycle defaults is not being published.” He said target-date funds create a more transparent framework.
Another issue is while target-date funds have a place in the U.K. DC market, there is “nothing really wrong” with the lifestyle structure, said Emma Douglas, head of DC at Legal & General Investment Management in London. The firm runs target-date funds and is “starting to get some interest” — a couple of clients will be investing early this year. “You could argue target date provides a bit more sophistication in terms of managing that journey to retirement, a bit more flexibility,” she added. LGIM is “in the happy position” of offering both lifestyle and target-date options, she added.
AllianceBernstein LP has seen target-date fund assets grow to £2 billion, with 25% of that coming in the past year. Most of that growth has come from master trust clients, said David Hutchins, a senior vice president in London and head of the firm's multiasset solutions business in Europe, the Middle East and Africa. But target-date structures have been less popular with corporate plans. “There has been probably a disappointing takeup among corporate pension schemes, where there is a high level of intermediation — TDFs do not always work naturally with many consultants' current business model,” he said.
Nico Aspinall, an independent consultant who works with money managers and providers of DC plans, said some master trusts already are using target-date structures and others are considering them. “But mostly that is an administration decision; most are still in control of the assets themselves and very few have delegated to the TDF manager,” he said. “It is an admin convenience.”
Another angle that might help with the uptake of target-date structures in the U.K. is the increase of open-architecture approaches, blending multiple managers' strategies in the default option. It is a similar setup for money managers to lifestyle investment strategies, where they do not control all of the assets, nor the asset allocation.