Clear measurable objectives are needed in the fight for greater DC outcomes
A Master Trust is often seen as a simple, all-in-one solution to DC pension provision. Its scale and independent governance are seen as key to delivering a better outcome for members
A Master Trust is often seen as a simple, all-in-one solution to DC pension provision. Its scale and independent governance are seen as key to delivering a better outcome for members. But, choosing the right Master Trust is hard, not only due to subtle differences between them, but largely as delayed gratification makes it unclear whether the 'right' choice has been made until members retire.
We believe Master Trust providers need to become more transparent around their objectives , making it clearer and easier for members to understand whether their pension arrangements are working towards the right outcome for them. Considering a measurable target income level for members might be one way to do this. Such an approach provides very definite and specific outcomes, rather than just a generic, sometimes quite qualitative rather than quantitative objective.
MASTER TRUST OBJECTIVES
At present each Master Trust states high-level investment objectives. But these objectives are largely the same: 'aim to achieve better member outcomes'. Whilst this aspiration is perfectly reasonable, it is vague, lacks detail and is not terribly measurable. How many Master Trusts would state they are not aiming to achieve member outcomes?
Some Master Trusts provide the required detail around their investment objectives and their Trustees work to deliver these objectives. But some don't, meaning there is no accountability for the pension people receive at retirement. And with no measurement along the journey, it will be too late for most people to take corrective action.
A BETTER WAY… LEARN FROM COST TRANSPARENCY
Through value-for-members exercises and transaction cost disclosures, there is now a vast amount of information available to members to better understand what costs they are exposed to. This means that they can make an informed choice.
Clearly this can have other consequences, e.g. inevitably cost disclosures have continued to see a push to the bottom in terms of fees, with almost all the Master Trust providers offering largely static passive investment solutions. In fact, the range of default charges across Master Trusts has fallen in recent years with the average sitting at 0.48%1. Whilst value for money is important, how should members “value” the ultimate outcome, i.e. what can they do with their accumulated pot in retirement.
A greater emphasis on outcomes could have the same impact on the industry; more clarity, and measurement of what the objectives are looking to achieve at a member level. A simple example is the projected pot requirements for the DC Chair's Statement.
At present the projected pots only illustrate the impact of fees. There is no requirement to comment on whether pot sizes look reasonable or are in line with the objectives of the default provider. Subjective assumptions underlying the projections also make it hard to compare projected pots among providers. This is because the end goal is rarely the starting point for DC schemes.
USING A MEASURABLE TARGET INCOME LEVEL AS A STARTING POINT CAN ENABLE DC INVESTMENT STRATEGY OBJECTIVES TO BE DEFINED MORE EXPLICITLY.
This will allow members and employers to determine and understand the success or failure of their pension arrangement more clearly. The PLSA living standards, the Living Wage or The Pension Commission's replacement ratios are all ways to help define the income needs of members and we believe that these should be explicitly embedded in Master Trust objectives.
Pension schemes exist to provide an income in retirement. But that endgame is in danger of being lost. A greater emphasis is required on the income members need at retirement and how Master Trust default objectives are set to help members to get there. Whilst the realised gratification for members may be delayed, this approach will help ensure there are no nasty surprises come retirement.
If you would like to know more about setting better objectives for DC schemes then please get in touch.
“But, choosing the right Master Trust is hard, not only due to subtle differences between them, but largely as delayed gratification makes it unclear whether the 'right' choice has been made until members retire.”
 "Charges, returns and transparency in DC: what we can learn from other countries?" December 2018, Pensions Policy Institute
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