By Michael Ambery, Head of DC Provider Relations, Laura Andrikopoulos, Senior Consultant and Actuary and William Chan,Head of DC Investment - Hymans Robertson
Finally, we expect to see one of the biggest trends of 2019 continue into 2020 - the move to Master Trust. Given the competitive pricing we’re currently seeing in the market, this year will be a good time to review pension scheme design and assess whether a Master Trust may provide better value. Read more about the key priorities for DC Consulting in 2020 as we look to the busy year ahead.
Responsible Investment
Responsible Investment (RI) is an area of increasing importance in the pensions industry for all underlying stakeholders (members, trustees, asset managers, investment consultants, the regulator etc.). Regardless of where these stakeholders sit, there are RI and ESG (environmental, social and governance) considerations at every stage of the DC pensions journey whether it is related to investments, communications, administration, governance, retirement etc.
Over the coming year, there are significant regulatory obligations related to responsible investment that many DC pension schemes will be reporting on, complying with and managing to. The asset managers, platform providers and investment consultant all have roles to play in monitoring, educating and responsibly managing these DC pension assets which will very likely in this new decade become the main source of long-term retirement income for DC members outside of their State Pension.
Besides the regulatory obligations, it’s also important to investigate and be discerning about the trends related to responsible investment. Our job as investment advisers is to note that ESG and responsible investment are areas that are still evolving. The data quality, research, underlying science and investor behaviour are all rapidly changing. Most products that have been launched do not have a long-term track record. But this does not mean that we should ignore them. Doing the ground work now will serve our clients and the industry as a whole well for the coming decade.
Master Trust
2019 was the year of the Authorised Master Trust. We saw in the latter half of the year and going into the new year, a scramble from providers to win business. Over the last three years, the trend has been a rapid move to Master Trust from Trust based schemes. Reasons for this include, decreasing regulatory burden, improving value and services pre and post retirement for members and the opportunity to refresh investment strategy, considering the likes of Responsible Investment. The move to Master Trust is not right for all but we do see this year to be one where the competitive pricing offered by providers an opportune moment to review the fees and services offered to members. This could also link with revising engagement and wellbeing strategies, ensuring that best value is given from a corporate perspective. 2020 offers a rare time to review pension scheme design and pricing in an era of very hungry providers to win work at low cost.
PLSA targets
5 pieces of fruit or veg a day and 2000 calories is a decent target for a healthy lifestyle. Knowing what you need to save by way of pension contribution to reach a target income and lifestyle in retirement is hugely eye-opening. PLSA launched their Retirement Living Standards late 2019. We’ve used our Guided Outcomes technology to help drive the modelling behind the PLSA’s initiative and we support the idea of bringing savings and targets for living in retirement to life. We view this year as the pivotal year for corporates to review their pension arrangements and how critical contributions are. This enables workforce management and engagement and also dovetails with financial and corporate wellbeing strategies. During the coming year, we expect corporates and trustees to analyse, determine and communicate these targets to members. This should bring new vigour to saving and awareness to retirement living. We’ve successfully used Guided Outcomes and communication strategies over the last 5 years with unprecedented success to help members engage and improve their retirement outcomes. We see PLSA targets driving a behavioural change with the support of leading corporates and providers.
Governance
2020 brings much emphasis on Governance. We look forward to the Regulator’s final response on its consultation on the Future of Trusteeship and Governance, and its guidance on the implementation of the EU IORP II directive requiring pension schemes to “demonstrate an effective system of governance”.
We expect greater guidance for Trustees on what constitutes a good level of knowledge to govern their schemes effectively, but would not welcome a move to an ‘hours counting’ culture or mandatory qualifications. We would also welcome a requirement for schemes to report on their efforts to enhance board diversity, albeit with the stress that what really matters here is cognitive diversity, the benefits of which are well documented. It would also be desirable to see greater emphasis on the benefits of collective decision-making and the importance of soft-skills to all those playing key roles in the governance of DC arrangements.
2020 will no doubt be a key year for demonstrating effectiveness on your Trustee board or Governance Committee. Risk management policies and procedures will need to be reviewed, particularly for risks such as Climate Change and Cybersecurity, and there will be greater stress on the importance of getting board composition right. All this will need to be tested by a thorough evaluation and documentation of board performance and effectiveness of governance arrangements. We also look forward to seeing the professional trustee accreditation regime fully implemented and would welcome a relaxation in the mandatory fine for ‘non-compliant’ DC Chair Statements – the time and cost of mitigating such a fine having become disproportionate to the governance benefits.
With good corporate governance higher up the agenda than ever in wider society, corporates will be looking closely at their governance arrangements around pensions. We are increasingly seeing those participating in Master Trusts and GPP arrangements setting up Governance Committees to oversee and scrutinise, and to ensure corporate objectives continue to be met. We expect this to continue and increase in pace over 2020.
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