Master trust default funds – a glimpse into the future

We sometimes joke at The People’s Pension that we should aim to deliver the best 10-year returns 50 years in a row. That reflects how long many of our members might need us for. But we work in a world where companies are terrified of reporting their failure against plans on a quarterly basis; where news headlines can knock whole markets in the space of days or weeks; and where high-frequency algorithms invest to profit in micro-seconds.

At the same time our industry is keen to compile tables of 3-year performance. We can’t give investment professionals a 10-year free ride without some oversight, and of course many members will not invest with us for anything like as long.

How can we marry the need to provide governance over what we do and react to events and opportunities with a multi-decade view?

Given this range of competing timescales, and given that the majority of master trust scheme members (98.7% in our case) choose to put their money into the default option, what could advisers expect a default fund to look like over the next decade?

What we do know is that The People’s Pension, on its current rate of contributions, and factoring in possible investment growth, could hold assets of in excess of £20bn by the middle of the 2020s.

That’s a useful yardstick for looking at what a fund of this size, in the master trust sector, could look like – how it can use its scale to benefit its members and society more broadly. It seems pretty clear that a large fund will have strong governance – and this is something that could be an increasing differentiator between default funds in the market.

Evolving and diversifying to benefit members and society

One of the main proof points is how a fund evolves to ensure it is fit for the future. This is evident in the strong and effective governance of the default fund itself. What we’ve done over the last year or so is look quite closely at the mix of growth assets in our default fund. We added emerging market shares, infrastructure and real estate to diversify our default portfolios.

This is simpler, more efficient and more cost-effective to do if you have scale – and at The People’s Pension we’ve actively sought this. With assets under management of more than £6 billion at the time of writing , our portfolios evolve in ways that benefit members directly.

It’s reasonable to expect a good default fund to look not only at diversification by asset class, but also by style – namely interesting opportunities that could boost the quality of investment returns received by members.

Factor investing is one. This complements diversification by using a different methodology to traditional passive approaches that just look at market capitalisation, seeking out investments with the potential to offer better long-term performance. These techniques can be hard to implement successfully but a provider with scale should be able to bring this extra investment approach into their default fund cost-effectively.

More opportunities to integrate responsible investment

Scale also helps a default fund achieve more in the field of responsible investment. It’s now widely accepted that businesses which treat their employees, society and the environment well tend to deliver better returns to their shareholders – which include master trust default funds.

Responsible investment is about ensuring that these businesses are properly represented in the fund – and the risks thrown up by businesses that don’t meet these standards are properly managed. We published our responsible investment policy last year – and have demonstrated its value by ensuring that our factor investments also address carbon exposure.

It’s interesting to see the Department for Work and Pensions is thinking along the same lines as us here, because they’re requiring major DC schemes, including master trust providers, to incorporate this theme in the content of their statements of investment principles and to publish these documents. That’s going to give advisers more information with which to compare providers.

The next decade may well offer market shocks and compelling opportunities – but that’s where an imaginative asset allocation, overseen by experienced professionals, armed with the right policies, should help members benefit in the long run.