Increasing interest in master trusts and ESG as DC market matures

Nearly two-thirds (61 per cent) of employers that continue to run their own trust-based pension arrangement have suggested that a move to a master trust is under consideration in the next two years, according to a survey from Willis Towers Watson (WTW).

In light of the findings, WTW argued that the defined contribution (DC) master trust market is entering a new phase of maturity and that some master trust early adopters are now looking for better options.

The survey found that 12 per cent of employers already using a master trust are considering reviewing their provider in the next two years.

WTW Retirement Business director, Gemma Burrows, commented: “For many employers that moved to a master trust five plus years ago, the options available in the industry have changed dramatically.

"Some of those employers are now starting to look around and consider whether there are more suitable, alternative providers that could offer better value or service to members.

“For those schemes it will be important to think very carefully about which provider can fulfil their needs over the long term.

“There is some consolidation happening in the market at the moment, so things are still changing and they won’t want to be revisiting the marketplace again in a few years’ time.

“This also suggests that plan sponsors are still keen to have oversight of these plans, even after outsourcing the governance, to make sure they continue to deliver a valued and a high-quality provision for their employees.”

Master trusts were not the only area of increased interest, as the firm found that the rate of environmental, social and governance (ESG) adoption in default funds has almost doubled over the past year.

Thirty per cent of schemes confirmed that their default investment option is now ESG focused, compared to 17 per cent in 2020, while a further 49 per cent of schemes stated that they plan to integrate ESG into their default investment funds in future.

Burrows highlighted this as demonstration of scheme sponsors' commitment to make it easier for members to invest in a way that takes these factors into action, emphasising that schemes are "increasingly aware that ESG can form an important aspect of engaging with members".

Furthermore, despite the financial strains that were facing both companies and employees amid the pandemic, WTW's survey found that maximum matches contribution level for FTSE 100 companies have remained “stable”.

In particular, for employer-matching DC schemes, average contribution rates remained over 17 per cent, while contribution rates for non-matching schemes averaged just under 11 per cent, which were both consistent with 2019 and 2020 levels.

In addition to this, a “significant minority” (16 per cent) of employers confirmed their intention to increase pension generosity in the short term, with none expecting contributions to be reduced.

Burrows commented: “There was concern this year we might see a reduction in benefits and commitment as organisations grappled with maintaining financial stability, and workforce planning.

"Far from this, what we see in this year’s results is a compelling desire for organisations to improve member outcomes and enhance the support that is provided to them.

“Clearly it’s good news for employees that DC contribution rates held up during the recent challenging financial circumstances for many employers.

“However, we can see that from a retirement savings perspective less than 20 per cent of companies enrol at a default contribution rate in excess of the minimum level on offer.

“Therefore, there may still be work to do to overcome inertia in decision making so individuals understand and take advantage of the more valuable contribution rates that could be available to improve their own outcomes.”

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