The pension industry has faced significant challenges in recent years, including the introduction of new regulation and governance standards, and changes to the state pension age and taxation rules.
But perhaps the biggest change to affect the sector is automatic enrolment, requiring all employers to enrol eligible individuals into a pension arrangement and make contributions to their pension. There are now 9 million members within some form of pension arrangement in the UK – 6 million of whom are members of NEST, the master trust.
Helen Dowsey, director of business development and account management at NEST, highlights increased governance and focus on how master trusts are run as having been a key development for the pension industry. One crucial element has been the implementation of the master trust assurance framework through which master trusts can seek accreditation for type 1 reports (creating the framework) and type 2 (demonstrating adherence to the framework).
Dowsey says she wants to see stability in the upcoming months, allowing the industry to take stock of where it currently stands and develop strategy plans for moving forward. As the staging of auto-enrolment comes to an end, phasing begins, under which the minimum contributions made by employers and employees increase in two phases – one by 6 April 2018 and the second by 6 April 2019.
Strategy, members and innovation
Part of NEST’s strategy for moving forward will be a focus on members, driven by the NEST Insight Unit – a research-based unit committed to undertaking and publishing research aimed at sharing best practice and practical solutions for improving member outcomes. Dowsey says that the industry as a whole should follow this approach – publishing data available to them so that all parties can learn from the information and build takeaways into their member strategies.
The master trust also plans to assess its membership in detail, adopting a test and learn approach for communication with members in order to strike the right balance between nudge and engagement for particular cohorts.
Another area of focus is on at retirement – reviewing the member journey for those both at the point of retirement and post-retirement, ensuring that individuals understand the options available to them. In addition, NEST will be looking at investment innovation, seeking to diversify further into illiquid assets following the introduction of a climate aware portfolio for target date funds within equity portfolios.
Opportunities and challenges
Speaking about opportunities in the marketplace, Dowsey highlights that the increased focus on governance and regulation on pension arrangements has resulted in employers having to spend more time and money on pension strategy. As a result, companies are looking to outsource their pensions arrangements to a master trust. In addition, employers that have legacy arrangements – which may often be the case if they have an acquisitive history – are often looking to roll pension arrangements all into one, again opting for a master trust.
But there are still challenges on the horizon. Although auto-enrolment has been successful, with phasing about to begin, pension providers, including NEST, need to ensure that members continue to save and invest in retirement. The impact of phasing on the number of opt-outs and cessations is currently unknown by the industry, and this number could be further affected by future external events. If the UK experiences a rise in unemployment, opt-outs could increase with members no longer able to contribute.
Macro-economic challenges could also unsettle pension providers with difficulties likely to arise if equity markets suffer a fall. Despite NEST’s policy to balance performance and risk, macro-economics still pose a threat to the master trust, and to all providers investing in markets.
Target date funds and ESG
Despite the potential challenges, NEST remains committed to ensuring that members receive the best possible outcomes in retirement. The target date funds are a key initiative for the master trust, enabling NEST to tailor its investment strategy for each cohort depending on retirement date. The pension provider is also ensuring that it balances its approach to active and passive management, remaining active on asset allocation within target date funds and deploying passive strategies on developed equity markets where NEST believes there are fewer opportunities to add value.
NEST has also built a climate-aware fund, aiming to provide the best outcomes for its members by taking environmental, social and governance (ESG) issues into account when making investment decisions. The fund involves dialling down on investments in large companies that are the biggest emitters with no plans to change their strategy and dialling up on companies that are more climate aware or have plans to change. The fund is driven by economic and social change, looking at what will provide the best long-term investment rather than ethical decisions.
While the pension industry has battled numerous challenges in recent years and could well face further obstacles in the years to come, employers and pension providers have made significant steps towards improving how individuals save for retirement, with the auto-enrolment staging process now completed.
The new challenge will be on keeping individuals invested in schemes now that minimum contributions have increased – something which will likely require improved pension engagement with members – and for government, employers and individuals to all assume responsibility for creating the best possible environment for saving for retirement.
Watch the full interview with Helen Dowsey and find out how NEST can help your company with your pension arrangements.