News / 21.01.20

5 reasons your pension scheme would be better off in a DB master trust - investment

Increasing running costs and stricter expectations from the Pensions Regulator are just some of the challenges facing employers and trustees of DB pension schemes. Many schemes, particularly those on the smaller end of the scale, would be better off in a DB master trust to overcome these challenges. From accessing better investment returns, to cost sharing benefits and economies of scale, we explore the 5 key reasons why you should consider transferring your scheme into a master trust like Citrus.

Reason # 1 – Generate higher, more stable investment returns

One of the key challenges facing smaller DB pension funds is the lack of access to the same range of investment opportunities as their larger equivalents. While larger schemes benefit from accessing best-in-class managers and funds, smaller schemes struggle to meet minimum investment requirements, or the higher costs associated with the latest innovations and asset classes.

But by pooling assets together into a bigger, more substantial master trust fund, these smaller schemes can generate much better outcomes – in some cases up to a 25% increase in returns. There are three main reasons for this:

1.  Access to a wider range of investment opportunities

Having a larger pool of assets means master trusts can access top performing funds and investment managers. This includes assets such as private debt and infrastructure which smaller schemes are typically unable to afford or access on a standalone basis

2.  Ability to implement a more sophisticated, capital efficient strategy

With access to these latest funds and innovations, master trusts like Citrus can implement much more sophisticated, resilient investment strategies. The resulting portfolio generates a regular, stable income which reduces transaction costs and helps to manage cashflow-related risks.

This more sophisticated investment strategy also enhances capital efficiency – essentially making assets work harder to provide better value for money. For example, using leveraged LDI and synthetic equities, Citrus’ investment strategy frees up c.45% of the assets in the portfolio, which can be reallocated elsewhere. Depending on the needs of each section within the master trust, the capital is used to reduce risk and/or seek higher returns. In Citrus’ case, this results in a c.25% improvement in expected return for each unit of investment risk taken – a very material improvement.

3.  Cost sharing with other sections

Finally, grouping smaller funds together achieves economies of scale, enabling assets to be run more cheaply and for a better price. By pooling assets across schemes, and sharing services such as scheme administration, running costs and fees are significantly reduced.

By moving into a master trust like Citrus, smaller schemes can get the best of both worlds: access to the same opportunities as larger funds, while maintaining the ability to tailor the strategy to meet their section’s specific needs and objectives and evolving that over time as circumstances and market conditions change.

A better performing investment strategy is just one of the reasons your scheme may be better off in a DB master trust. Watch out for the next blog in our 5-part series where we look at how you can meet your long-term objective with more certainty.

If you would like to find out more information in the meantime, please contact Lindsay Davies.