Master trusts look to be better choice for next generation

Multiemployer plans will boost the retirement outcomes of future workers better than plan sponsors currently can on their own, U.K. experts agreed, adding that efforts to extend auto-enrollment programs to more groups will reinforce master trusts as the plans of the future.

More plan sponsors will succumb to the power of consolidated DC plans in a master trust because these entities enable access to more investment choices at lower fees as well as to trustees with more experience managing DC investments. Indeed, the number of plan sponsors selecting to outsource their company plan to a master trust, also known as a multiemployer plan, is expected to triple in the next five years, according to a survey of 200 U.K. DC plan executives published by consultant Aon PLC on Feb. 18. Assets in U.K. master trusts will reach £424 billion ($549 billion) over the next decade, according to an estimate by London-based data and analytics provider Broadridge Financial Solutions Ltd.

That's because retirement plan trustees are faced with ever-increasing regulatory requirements, while master trusts are well-positioned to benefit from outsourcing, noted Alistair Byrne, London-based managing director and head of Europe, Middle East and Africa pensions and retirement strategy at State Street Global Advisors Ltd. For example, on March 4 Fujitsu Ltd. outsourced its £730 million defined contribution plan for its U.K. employees to Willis Towers Watson's master trust, the £7.5 billion LifeSight.

"We will see a continuation of moving away from employer-sponsored plans to master trusts as well as other types of multiemployer provisions," Mr. Byrne said in a telephone interview.

And as single-employer defined benefit plans continue to disappear, "individual emphasis will become much less common," he said.

Future consolidated retirement plans, sources said, will feature:

• More impact investments.
• More sophisticated or multiple decumulation strategies.
• Investments in private markets.
• Plan consolidation enablers such as dashboards.

Sources said adding more groups of participants into the mix, including self-employed workers and part-time worker earning below £10,000, will further boost multiemployer plans' assets. Zoe Alexander, London-based director of strategy and corporate affairs at the £10 billion ($13 billion) multiemployer defined contribution plan National Employment Savings Trust, London, said the U.K. government's intention is to phase out the minimum salary threshold that is currently stopping part-time workers from being captured by auto enrollment.

"The best way to include women working multiple jobs and earning £10,000 a year is to lower that trigger," she said. Ms. Alexander added that the removal of this barrier could also apply to the self-employed, whose monthly incomes vary. The U.K. auto-enrollment program is expected to be next reviewed by the government in the mid-2020s. Currently, part-time and self-employed workers can voluntarily invest through NEST.

In other European countries, debates over an extension of auto-enrollment programs to more groups are accelerating. For example, in Germany, a commission of experts that was set up in 2018 to deliver a sustainable retirement system is working on a new DC plan category for low-income earners. The commission's work is aimed at extending a DC legislative framework effective since 2018 beyond industrywide plans to cover low-income workers, who are not covered by any auto-enrollment system. Sources said a new plan category for individuals could be agreed to in 2020, covering 40% of Germany's total workers. Heribert Karch, CEO of the €7 billion ($7.6 billion) metal industry retirement fund MetallRente GmbH, Berlin, said the new model could mimic U.K.'s NEST in how it will enroll workers from all industries.

Looming large in European plan executives' minds is also how they will incorporate environmental, social and governance factors into investment default options in the future. About 49% of U.K. plans surveyed by Aon invest in one more or more ESG funds via their default options or offer a range of ESG options in their investment lineups already. SSGA's Mr. Byrne said in the future, plans will increasingly become more sophisticated when it comes to implementing ESG factors by including more strategies aimed at impact investing and climate-specific considerations.

He noted that currently plans tend to only focus on a small number of exclusions on ESG grounds, for example, excluding controversial weapons producers. "Plan sponsors also tend to improve the overall profile of the portfolio from a climate perspective by investing away from companies with low ESG scores," he said.

More sophistication is also coming to plan design when it comes to decumulation strategies, sources said. After the dust has settled on auto-enrollment regulation in the U.K., the country's regulators will pay more attention to improving strategies in retirement to tackle increases in life expectancy. Gregg McClymont, director of policy and external affairs at B&CE, West Sussex, England, the sponsor of the £9 billion defined contribution multiemployer plan People's Pension, said that future DC plans will feature a later-in-life annuity component, also known as a deferred annuity.

Noting that, for example, Danish occupational pension funds offer a combination of investment drawdown and a later-in-life annuity, he said that master trusts with scale will be able to do it in the U.K. — if relevant regulation is in place — because they can drive down fees for these products.

Currently, a later-in-life annuity is obtainable in the U.K. market but requires large scale of assets and is expensive, consultants said, adding that with scale, plans can get a better price.

NEST is supportive of a later-in-life annuity concept alongside lump sums and drawdown solutions in its future of decumulation blueprint, Ms. Alexander said. NEST currently does not have a default decumulation strategy, but Ms. Alexander said, "Large DC schemes should look how a decumulation pathway should be designed in-house."

In efforts to boost investment choice in the U.K., the Financial Conduct Authority is working to improve choice in the decumulation market for other DC plans. Currently, some 55% of plan participants opt to take their retirement dollars in a lump sum, according to the figures by the FCA.

As new participants retire in 2020 with some £2 billion in combined assets a quarter, the regulator is gearing up under its new regulation, effective Aug. 1, to require managers and record keepers to supply "pathways" to all four options: a drawdown product where a participant remains invested during decumulation; an annuity product; a drawdown product where participant is ready to receive income; and a cash product in the £171 billion personal plan DC market.

The asset allocations of master trusts are also expected to evolve in the future, with higher asset levels providing scale to better invest in more expensive asset classes such as infrastructure, sources said. In the U.K., the first plans began to incorporate allocations to private markets into the glidepath of their default options, starting with NEST in 2019 and the £1 billion DC section of the £68 billion Universities Superannuation Scheme, London, at the start of 2020. USS will be investing in infrastructure, property, private debt and private equity, including onshore and offshore wind farms, airports and utilities.

Noting that in the not-too-distant future more U.K. plans will follow the Australian model, which has seen DC superannuation funds invest around 20% in alternative investments, mostly illiquid, Maria Nazarova-Doyle, head of pension investments at Scottish Widows Ltd. said: "This is due to the fast pace of growth of master trusts' assets, the development of their internal investment teams and the 'lower-for-longer' returns projected from public markets."

Sources said in the future more plans might consider also extending private markets investing into their decumulation strategy. There is a broad consensus that any future retirement product will eventually incorporate higher income-yielding private markets exposures, Mr. McClymont said.

In Australia, the A$42 billion ($27.8 billion) Hostplus Super, Melbourne, Mr. McClymont noted, is looking at introducing a decumulation product that will have the same profile as its balanced funds, where 40% is exposed to alternatives.

Also, noting the Australian model in which retirement accounts follows participants from job to job within the MySuper framework, Brian Henderson, Mercer's Edinburgh-based partner and director of consulting, said that retirement account consolidation is in the cards for the U.K. market when the Pensions Schemes Bill arrives in the U.K. later this year.

Mr. Henderson said a proposed dashboard as part of the bill would allow participants to see all their retirement savings in one stop. That could help participants track their savings, including state pension and multiple DC plans, and ultimately helping them merge savings accrued from different jobs. With the dashboard, consolidation can be made easy, he said.