A growing number of people will reach retirement with only defined contribution pensions, many of them from master trusts. Against a changing and increasingly disruptive investment backdrop, the master-trust industry will have a series of challenges to navigate in seeking to meet members’ diverging requirements.

A key issue remains how to engage with members on their options – even at retirement. While some members with larger pots are exploring drawdown and annuity options, a high proportion of individuals currently choose to withdraw the cash and leave it in a low-earning bank account. There is an opportunity to do much more, for example by allocating to high yield and private credit, but fresh thinking will be required from the industry, alongside member education. Until now, master trusts have had a near-universal emphasis on lowering costs as a way to indicate value for money. A shift to focusing more on the best use of cost budget within the cap could encourage some badly needed innovation.

It will also be important for schemes to respond to the transitions taking place in economies and markets. After a very long bull market, fixed-income investors now face the prospect of a more inflationary environment and rising yields. The transition to a low-carbon economy increases the potential for stranded assets, while Covid-19 has accelerated changes in consumer behaviours and has led to a greater focus on societal impacts. All these disruptive elements suggest that care should be taken in holding legacy-based benchmarks. We believe an active investment approach, which looks for companies with the highest potential for improvement and innovative ideas, has a significant opportunity to add value.

In this context, the growing focus on environmental, social and governance (ESG) considerations and sustainability is particularly relevant. First, ESG analysis has a critical financial role in evaluating companies with the potential to suffer if they do not sufficiently address sustainability. But ESG issues are also of high interest to many members, and can be a potential engagement point in a way that finance typically is not. Younger cohorts may have a far greater desire for information and interaction as well as become more vocal on ESG expectations. While it is too early for clear answers, having distinct ESG positioning and strong reporting could become key differentiators for master trusts.

Important information
This is a financial promotion. This article is for professional investors only. These opinions should not be construed as investment or any other advice and are subject to change. This article is for information purposes only. Any reference to a specific security, country or sector should not be construed as a recommendation to buy or sell investments in those securities, countries or sectors. Issued by Newton Investment Management Limited, The Bank of New York Mellon Centre, 160 Queen Victoria Street, London, EC4V 4LA. Registered in England No. 01371973. Newton Investment Management is authorised and regulated by the Financial Conduct Authority, 12 Endeavour Square, London, E20 1JN and is a subsidiary of The Bank of New York Mellon Corporation. Newton Investment Management Limited is registered with the SEC as an investment adviser under the Investment Advisers Act of 1940. Newton’s investment business is described in Form ADV, Part 1 and 2, which can be obtained from the SEC.gov website or obtained upon request. ‘Newton’ and/or ‘Newton Investment Management’ brand refers to Newton Investment Management Limited.

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