The Spence Johnson Blog

By , 16 January 2015Market Intelligence | DC Pensions

Workplace DC 2014: The year of the master trust

As auto-enrolment has reached smaller and smaller firms master trusts have prospered. In the past year master trust share of DC membership has grown from almost nothing to 27% (a total of around 3.5 million members). Our analysis shows they are not alone, however, as contract-based schemes have also seen significant inflows of around 1.3m members.

The growth exhibited by these offerings in 2014 appears to confirm our ongoing hypothesis that employers are increasingly turning to simple, low-cost solutions to fulfil their auto-enrolment responsibilities. As smaller and smaller firms undergo auto-enrolment we are predicting as much as 85% of those firms yet to pass their staging date may opt for the master trust option.

The growth of master trusts in particular can be ascribed to highly efficient on-boarding processes and low-cost approaches that have made them attractive to small firms (who often very have limited pensions administration or HR resources) looking for an auto-enrolment partner.

However the story is not just about costs. The higher level of governance master trusts appear to offer when compared to pure contract-based schemes is another element of their appeal. Indeed evidence emerged in 2014 to suggest it is not just small schemes that have been attracted by this aspect of master trust offerings.

In the past we have predicted growth in master trusts would be driven particularly by the closure of trust-based schemes. Our latest report, however, cites evidence from the 2014 Towers Watson 350 survey which revealed that the percentage of FTSE 100 schemes with a trust-based arrangement has actually remained largely stable since 2012 (at 48%), a fact that we believe has gone largely unnoticed by many observers.  What has fallen, as use of master trusts rose from 0% to 6%, was in fact the use of contract-based arrangements by FTSE 100 companies (from 52% in 2012 to 46% in 2014).

This suggests that even among some of the larger schemes the higher level of governance offered, as it were, ‘off-the-shelf’ by master trusts is attractive when compared to the contract-based offerings. This view may change with the proposed introduction of Investment Governance Committees (IGCs) by the providers. Although technically ‘in-house’ over 50% of IGC committee members will have to be ‘external’ and they will take on a quasi-trustee role of reviewing new provider offerings to ensure members are receiving value for money.

Even if contract-based arrangements are improving their governance, however, what is clear is that that auto-enrolment is creating a position for master trusts that is right at the heart of the emerging DC pensions system. By 2024 we estimate they will account for 41% of the membership and 16% of the assets within the £787bn workplace DC market.

By Nils Johnson, 19 November 2013Market Intelligence | DC Pensions

The future of workplace pensions is clear

It’s been 5 years since our first report on the Future of DC and now, as we near the end of 2013, we finally have real clarity on what UK workplace pensions will look like in the future1. The political consensus of two successive governments, and especially the work of the current pensions minister Steve Webb, has a lot to do with how far we have moved towards that future, but providers and Trustees, consultants and regulators have done their part too.

That future can be characterised by three broad features; a very high savings participation rate among private sector employees, very strong growth in individual pension assets, and a fiercely competitive marketplace for providers.

In practical terms, there is a lot of work to do but in most of what we see, there is room for optimism. For example, 1 year into auto enrolment, opt-outs stand at around 9% - as we predicted. We expect this to rise to 30% as smaller schemes stage; but even this level will be considered a huge success. In terms of affordability, average member charges now stand at 71 bps. But these will fall over ten years to an average 64bp; in fact, by 2023 members in all but the smallest schemes will experience all-in charges of 50bps or less.

This high participation rate will drive a phenomenal growth in assets. From a base of £214bn in 2013, assets will grow 12.2% pa to reach £676bn by 2023. In nominal terms, this translates into £35bn pa of member contributions flowing into DC accounts for each of the next ten years. The main beneficiaries of this growth will be large institutional style schemes with asset growth rates of 18% - compared to 10% for retail.  In a classical pattern of market concentration, over 50% of the AUM will end up in larger schemes with over 1,000 members.

With participation rates and asset growth projections like these, this market is going to get even more competitive. The bundled providers have suffered most to date but their experience should improve going forward with average price falls of only 1% pa over the next ten years. But with a 20,000 fall in schemes and Master Trusts capturing 23% of members, some of the 11 current providers are going to give up the game. The same can be said of investment suppliers where we expect a contraction of 25% in active third party managers. Most of the smaller IFAs will likewise be driven out of the value chain but better managed mid-sized EBCs and large consultants should adapt and thrive.

There is a lot more detail to be teased out in from these three broad trends, but for us, the future of workplace pensions is now basically clear.

1 See DC Market Intelligence, 2014 for a full list of predictions

By Will Mayne, 4 June 2013Market Intelligence | DC Pensions

Should all asset managers have a DGF?

The Diversified Growth Fund (DGF) market is already substantial and is set to grow considering over the next few years. We estimate that the institutional or quasi institutional market in the UK is £66 billion. This, we believe, will grow to £99 billion by 2018, with over £30 billion expected to flow into DGFs over the next 5 years. There is therefore a significant opportunity for DGF managers both now and in the future.

Success to date has however been elusive for all but the largest DGF providers. Despite being marketed as an absolute return fund and not a DGF, Standard Life Investment’s GARS fund nevertheless is considered a DGF by many pension trustees and is by far the largest fund residing under the DGF brand at £25 billion in assets. It is joined by popular funds from Newton, BlackRock, Baring Asset Management and Schroder’s. These top five providers currently control nearly 90% of the institutional, or quasi-institutional, DGF market by assets. Outside of the top funds there is a long tail of DGFs which have been unable to accrue significant assets and must be considering their future in the market.

Not all hope is lost however; we believe that new opportunities will begin to emerge for DGF managers. The asset inflows we predict cannot be managed by today’s winners alone and funds will begin to close from capacity constraints. Baillie Gifford’s DGF is a notable example of a successful fund which has closed this year due to a surge in inflows. The future also looks increasingly likely to be less about which single DGF to invest in but more likely which combination of DGFs are best suited to your needs. This ‘blending’ of DGFs will create opportunities for funds outside of the current winners.

Our latest market intelligence report on the UK DGF Market offers in depth analysis on the UK DGF market and details the critical success factors. 

By Will Mayne, 2 May 2013Market Intelligence | DC Pensions

New ideas for engaging savers with DC pensions

The Pension’s Policy Institute (PPI) is currently working on research1 to determine the factors that govern whether an individual will obtain an adequate income in retirement. The details of the research will be fascinating but even now we can predict that the level of contributions made during working years will be critical to the eventual retirement income obtained.

Early engagement with the unfortunate reality of needing to save for life after work is therefore vital. The ABI highlighted in research2 in 2012 that “awareness and understanding of how defined contribution pensions work, and engagement with decisions that will need to be made at retirement, were very low”.  The pensions industry is therefore eagerly listening for new ideas as to how to engage DC savers with their pension.

Work we recently participated in with the Defined Contribution Investment Forum has raised some interesting insights around this very question. The DCIF research3 explored one possible approach to driving engagement; that some funds could be built around a ‘social objective’.  The research offered savers the opportunity to select pension funds that directed some assets to support social causes; sustainability, local communities and local businesses. The DCIF found that 77% of respondents favoured a social investment fund over a conventional fund. 44% of respondents still preferred their chosen social investment fund even when they were told they would receive an 8% smaller pot at retirement.

Although consumer research has well documented weaknesses as a predictive tool, it does indicate that some individuals could prefer a pension which directs funds to causes they value.  The possible implications of this are intriguing. Would individuals be more likely to pay their pension more attention if it better reflected their values? Would directing money towards causes they favour leave consumers feeling more positive and empowered in regards to their pension? Could this impact contributions rates? With our estimates indicating there will be nearly 10 million more DC savers by 20224, these are questions worth considering.

1 What level of pension contribution is needed to obtain an adequate retirement income, Pensions Policy Institute, 2013

2 Shopping Around for Retirement Income: Unrequested Annuity Illustrations, Association of British Insurers, 2012

3 Identifying new ways to engage with savers in Defined Contribution Pension, Defined Contribution investment Forum, 2013

4 Defined Contribution Market Intelligence 2013, Spence Johnson, 2013

By Magnus Spence, 29 April 2013Market Intelligence | DC Pensions

Small schemes are not important, right? Wrong!

There is a deep reluctance in government or regulatory circles to give us measures on the whole UK DC market.  For example in an otherwise very important and useful DWP survey (“Pension landscape and charging: Quantitative and qualitative research with employers and pension providers”) there is no analysis of schemes with less than 6 members.

Now you may say this is picking hairs.  Very small schemes are not important, right?  Wrong!  Very small schemes are a huge proportion of the DC market.  In a recent study we carried out with 12 Pensions Providers (summarised in “Defined Contribution Provider Group Data Summary January 2013”) we showed that among schemes serviced on a bundled basis,  80% of schemes have less than 25 memberships. 

So, small schemes are numerous.  But even more importantly, they have a disproportionately very high value of assets per member.  We have toyed with numbers here, and are not yet 100% sure of our ground, but we think it may be possible that the assets per member – which we estimate average around £30,000 per member across all of DC – are as high as £500,000 or more per member among very small schemes.  By very small schemes we mean those with less than 6 members, exactly that group completely ignored by the DWP’s own survey.

We are debating whether to go with cock-up or conspiracy as our conclusions on this one.  Conspiracy would suggest that there may be a policy-driven reason for not wanting to bring to our attention this small group of very wealthy pension savers who have benefitted so much from tax relief in the past 20 years.   Hmmm.  Concluding that this oversight is a cock-up would suggest that those responsible for monitoring and regulating our pensions market have little understanding of its dynamics and are being blind-sided by assumptions like “small schemes are not important”.  Neither is a very healthy conclusion.