As Pensions Insight launches its fifth annual DC Landscape research survey, in association with Legal and General Investment Management (LGIM), we asked Emma Douglas, head of DC Solutions at LGIM, about current trends in defined contribution
What are the key trends that you’re seeing in defined contribution pensions at present?
Interest in master trusts has been increasing for a while but there’s now a clear trend of schemes and companies looking to move to a master trust arrangement. And this isn’t just about smaller arrangements - even significantly sized schemes are now starting to look at fully outsourced DC. They may want to retain their own governance committee, but outsource governance responsibility alongside other activities such as administration.
Why do you think that’s happening?
Keeping pace with increased regulation has become a constant for DC schemes, and the Pensions Regulator is now focusing much more intensely on trust-based schemes.
Sometimes it’s about cost savings as well. Some schemes will have adviser relationships that were part of broader arrangements with a DB arrangement that has since gone to buyout. Employers may then question why they are still running a trust-based model solely for DC.
There can still be plenty of flexibility around communications design in a master trust, and even within the fund range – although you would still need to take investment advice around bespoke options.
What about investment trends?
We’re seeing much more focus on environmental, social and governance (ESG) and climate considerations. Trustees are more actively debating whether they have taken account of ESG, and how it is put into action in their portfolio. We saw HSBC commit to our Future World Fund as part of its default arrangement, and NEST has also been very active in this area with UBS’s Life Climate Aware World Equity fund within its default fund structure. ESG and climate change funds were once restricted to self-select options, but they are entering the mainstream.
We are also beginning to see more debate around trends such as illiquid assets in DC investment.
‘Post-retirement’ now has a completely different meaning when it comes to running DC pension schemes – what trends do you see there?
The DC journey doesn’t end at 65 any more. Most people are still taking cash, but that won’t be the case forever and we are beginning to see more of a focus on post-retirement options.
If you are running an own-trust scheme, the big question is how to facilitate drawdown. Most won’t want to do that within their own scheme. There’s also the question of how to handle annuitisation, and how that fits into later life.
This is another reason why we’re seeing a lot of enquiries about master trusts –with a master trust, there is no clunky transfer of members between an own-trust scheme and another arrangement when they retire, they can just stay in the same scheme forever.
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