Pension trustees and sponsors urged caution in selecting master trusts


Pension plan sponsors and trustees should consider the master trust’s investment returns when making investment decisions, as the LCP says there can be a difference of over 600 basis points between the best and worst performing providers.

The consulting firm also urged trustees and sponsors not to fixate on small differences in fees when deciding on a master trust.

In his report Master trust unpackedLCP highlighted the “wide variety” of approaches that Master Trusts take with their standard investment strategies due to differences in investment philosophy, membership base and client acquisition.

The report describes some of these strategies, such as anticipating pot size growth by taking more risk during the growth phase and de-risking over a relatively long consolidation phase, while others take the opposite approach.

According to the LCP, the strong performance of the equality markets over the past five years has benefited master trusts such as Aon, Lifesight and Aegon, which invested almost 100 percent in equities in the first few years before retirement.

Meanwhile, providers with more diversified approaches would have achieved lower returns over the same period due to their diversified approaches, the consultancy noted.

LCP also found that only two-thirds of Master Trusts were expected to provide a “moderate” PLSA retirement living standard for an average saver, and in relation to climate change-related issues, LCP modeling suggested that four of nine Master Trust strategies could score 20 percent or greater drop in results expected by members if global temperatures surpass 4 degrees.

The report found that master trust providers had different retirement goals, with some designed for drawdown and others for a broader range of member options, resulting in a lower-risk approach to retirement.

LCP partner and author of the report, Nigel Dunn, commented: “Sometimes the choice of Master Trust Provider is largely based on tiny differences in fees.

“However, our research shows that differences between master trusts in their investment strategy and the resulting investment outcomes can be literally a hundred times more important when determining the size of members’ pension funds.

“Decisions on which master trust to use must be multi-faceted and take into account investment strategy, including in the run-up to retirement, as well as a range of other factors such as good governance and efficient administration, and not just which is the cheapest provider.”


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