Focus on cost spurs race to the bottom

Focus on cost spurs race to the bottom

The skewed focus on cost over value by some of the UK’s biggest master trusts threatens to create a race to the bottom.

This is among the headline findings of a new study into investment strategies commissioned by the Defined Contribution Investment Forum (DCIF).

Workplace pension charges have come under the limelight in recent months after the government revealed, in mid-December last year, that it will review the level of the charge cap imposed on auto-enrolment funds in its review of auto-enrolment.

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Funds used in auto-enrolment schemes must be capped at 0.75 per cent under current rules. 

At the report launch event, DCIF executive director Louise Farrand said: “Our worry is the race to the bottom in terms of cost.”

She added: “We are concerned that if every single master trust is competing on a cost basis, the Department for Work and Pensions will say: ‘Okay, fine.’ You can do this [run pensions schemes] for no money at all, but that is not necessarily in everyone’s best interest.”

“Buyers of master trusts aren’t necessarily that sophisticated and they are probably looking for the most affordable proposition. If I knew very little about investments and pensions in general, and thought of auto-enrolment as a compliance exercise, I would probably look for the cheapest thing for my members also. I think there is a real issue around buyers’ education.”

She added: “Everybody has different views of what value for money constitutes, so it is an incredibly difficult thing master trusts are trying to do here. We are not downing master trusts for what they are doing, but they are wrestling with some difficult issues and we are keen to help them on some of the more difficult questions.”

The study, authored by Nico Aspinall, defined contribution consultant, analysed a total of 17 master trusts: five consultant-led, six insurance-led and six independent with assets under management totalling £10.7bn.

The explicit focus on fees is to the detriment of asset diversification and results in the gravitation to passive solutions, according to the study.

Disclosures and interviews with the sample revealed the investment costs of many “very low-cost” standard propositions offered by master trusts are in the range of four and 20 bps. This leaves little scope for the allocation of pricier actively managed or illiquid assets.

The report features a quote from one master trust interviewee who pointed to the advent of a charge cap as a barrier to the inclusion of a sufficiently large proportion of actively managed assets that would have a meaningful effect on investment performance.

Meanwhile, several respondents argued active management could not add value with the exception of particular asset classes – most commonly emerging market equity, debt and high-yield bonds.

Ms Farrand said: “We are trying as a group to move away from the religious active versus passive debate and think of them as different types of tools to get you to a particular income replacement level.”