U.K. push for value could spark opportunity

U.K. defined contribution plan sponsors are reviewing multiemployer plan providers as the U.K. government continues to push employers and trustees to examine if plan participants are receiving good value for their investments.

The U.K. government said June 21 it wants to see further consolidation in the DC market to improve retirement outcomes, which sources said could push more employers to consider outsourcing to a master trust. Sources said that trustees of larger plans also might be required to review investment providers in order to see if outsourcing could help improve outcomes for plan participants. Such reviews could encompass plans with assets of up to £5 billion ($6.9 billion), they said.

Trustees of smaller plans with less than £100 million are already required to determine if their plan participants could be getting better value from another provider, which could include a multiemployer plan, known in the U.K. as a master trust.

Meanwhile, plan sponsors that have already outsourced their DC arrangements to master trusts over the years are looking at, and in some cases already are, switching providers because they are finding that other master trusts can supply a more attractive offering.

Consultants said that first moves from one multiemployer plan to another are underway as plan sponsors want to improve investment performance and improve participant engagement.

Companies also want to reflect their own sustainable investment strategies, including carbon emission reduction pledges, in the policies of their master trust providers.

"We are doing one transfer at the moment from one well-known master trust to another," said Mark Futcher, partner and head of DC at consultant Barnett Waddingham LLP in Amersham, England, adding that the provider's investment performance was the trigger for the change. He declined to name the plan sponsor or the master trusts.

A survey of FTSE 350 companies conducted by Willis Towers Watson PLC published July 12 showed that 12% of employers that already use a master trust are considering a review of their provider in the next two years.

Master trusts appeared in the U.K. to assist employers with DC arrangements following the launch of an automatic enrollment program in 2012 by the government, which aimed to get more workers covered and bolster their overall retirement savings.

As of Dec. 31, there were 38 master trusts in the U.K. with a combined £52.8 billion in assets, according to data by The Pensions Regulator.

Mr. Futcher said employers that outsourced to master trusts years ago take comfort in that their provider looks after plan participants. "But that doesn't mean that it's the most competitive offering on the market," he said. The first employers that outsourced to master trusts a few years ago can now see there is a better proposition elsewhere, he added.

Mr. Futcher said his firm already conducts an annual governance review of master trust providers because companies want to examine investment options, investment performance, administration, costs and the effectiveness of participant engagement. "We are getting a lot of work as an independent consultant doing that assessment," he added.

Sources also said that companies are increasingly building review frameworks into their contracts to have an option to change heir providers when assets of their plans increase in size.

Jenny Davidson, independent trustee at BESTrustees in Esher, England, who also serves as a trustee on the boards of a few single-employer DC plans, said most companies that are outsourcing to master trusts for the first time are setting up key performance indicators and governance committees that will allow them to review the service on investments and charges.

"If you can build in a formal review of the charges into your contract that would be a favorable thing," she said, adding that as plans increase in size, they want to be able to review fees.

Ms. Davidson added that the government's push to get trustees and plan sponsors to review their investments will lead companies to switch providers. "Some of the larger companies have put in a governance framework in place … (to) keep monitoring their master trust to make sure that it is offering good value for members," she said.

Dave Lunt, head of business development at B&CE, the provider of the £14 billion DC multiemployer plan The People's Pension, said consolidation into larger master trusts is expected to continue. "We expect this to continue as employers review the value for money requirements now mandatory for schemes with less than £100 million invested and the further plans to introduce the same measures for schemes with assets under management of £5 billion and below," he said.

"Sponsors and trustees need to recognize the key strengths of larger master trusts for strong governance and real scale that will future-proof good outcomes for their members," he added.

Ms. Davidson added that the government's ongoing push to get trustees to review how plans are run will also influence companies to switch providers away from smaller master trusts, which might not be sustainable if they fail to attract enough assets to secure better pricing.

Gemma Burrows, director at Willis Towers Watson's retirement business in London, added that as companies add new workers or grow by acquisitions, they might be able to get better terms with a new master trust provider.

"Plan sponsors are quite keen to maintain some oversight of master trusts and that means benchmarking the performance of their master trusts against their peers. That will certainly be coming up," she said, noting that companies are not outsourcing the responsibility for selecting and monitoring the master trust. In the U.K., a review of a master trust provider is conducted by the sponsoring company when deemed suitable.

Ms. Burrows added that providing an offering that is going to deliver value to plan participants is one of the biggest costs for plan sponsors.

WTW advises clients that ended up with multiple plans due to mergers and want to bring all DC arrangements together. With assets and plan participants consolidated, such clients are considering if a better offering is available to them, she said.

Trends in a wider DC market show that changing master trust providers will become a standard practice for much of the same reasons that would push an employer to a master trust, said Hal La Thangue, associate director of global insights at Broadridge Financial Solutions Inc., Lake Success, N.Y.

A 2020 survey of 200 plan executives conducted by Broadridge showed that about 25% of plan sponsors in the U.K. DC market changed their provider in the most recent 12 months. Mr. La Thangue said that "it's quite expensive to switch providers and it requires resources and it has to be created by some sort of deficiency such as cost or investment performance."

Mr. La Thangue said 27% of the surveyed DC plan sponsors tended to change providers because they wanted better support for plan participants, 19% wanted a cheaper offering and about 18% sought better investment performance.

Barnett Waddingham's Mr. Futcher also said the U.K. DC market has become more competitive because some master trusts have been going through a transition, such as Aegon Master Trust, which agreed to acquire BlackRock's record-keeping business in 2016.

"Now they are coming back very competitive," he added. Mr. Futcher said that some providers are offering to cover transaction costs or are offering free advisory sessions for plan participants.

WTW's Ms. Burrows added that master trust providers are also showing much more ESG commitment. "For plan sponsors, that is very important at the moment. Plan sponsors are linking their corporate policy and the pension (one)," she said.

In one master trust provider's view, the opportunity is there to snag more business.

"We have started to see employers looking at moving from one master trust to another in the last few months,'' said Tony Pugh, head of DC solutions for Europe, the Middle East and Africa at The Aon MasterTrust. "One of them is in the process of moving to the Aon MasterTrust." He declined to name the plan sponsor.

The master trust has £1.3 billion in assets and another £300 million in the process of onboarding.