Q1 2020 blog

Investment landscape and view for 2020

Alex Cave |15-Jan-2020

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The year ahead for retirement

I’m excited to be writing my first blog of the year and would have got this out sooner had it not been for some huge events in January such as Brexit (it actually happened), impeachment trials, virus outbreaks and our own big news on Sustainability… So here’s my view on what lies ahead for the retirement and savings market this year.

What's in store for 2020

2019 saw changes which in any other industry would have been felt as seismic, but with the volume of market and regulatory change in pensions, in a lot of ways it just felt like another busy year. Auto-escalation in April saw a decent increase in pensions contributions and a good step towards securing spending adequacy in retirement, but like all good health plans this one has milestones and so whilst it was good to hit 8% (Source: The Pension Regulator, 2019) we know we need to go further and 15% feels like a more important target. It will be interesting to see if this comes back on to the government agenda, now there is a mandate to lead will there be less discomfort about the perception of taking money out of peoples pay packets knowing that it is in the best interests of their future self? I hope so as it is critical that we get people saving more than they do today.

2019 also saw 38 Master Trusts (MT) go through an extensive authorisation process, giving them real credibility as pensions providers and this year will show that they will become a critical component of pensions provisions for the UK. In 2020 we expect to see rapid acceleration of the switching to Master Trusts, particularly with schemes who are under £10m in assets but certainly in larger schemes too. In time we believe they will challenge the dominance of the insurance platforms which can only be a good thing if it brings variation, choice and price competition. It should also give members currently in small schemes access to better infrastructure, better communications and hopefully some access to post-retirement solutions. Our only concern is whether their default is too low cost, too simplistic and whether it effectively delivers what they want from an environmental, social and governance (ESG) perspective. We need a better way to compare platform and MT defaults but how is the question. Answers on a postcard please.

On that note the other themes which we expect to come through relate firstly in ESG and secondly in asset class access. Our focus is to continue to evolve our own target date franchise to integrate ESG and as we and other managers launch further products to give more granular options, we expect to see the market more broadly adopt these as a hygiene factor for defaults. Some interesting dialogue to be had around costs as licensing ESG indices is more expensive and the management process more intensive and therefore costly. Are members prepared to pay a small premium to ensure their pensions investment has a more positive impact?

An alternative hot topic

On the asset class front we expect to see illiquids populate more defaults as sophisticated trustees look for better returns and more diversified portfolios. We all want to increase the size of the members pots at retirement and with assets that are locked in for 40 years, capturing the illiquidity premium has to be part of the solution. Having worked tirelessly on developing this within a cost cap and to a market which is built on daily valuations I’m excited that we are nearing fruition.

Plenty more to talk about still, with more detail on Alternatives, discussion on retirement pathways and how we are making Sustainability part of BlackRocks DNA, but I will leave that for another time.

Alex Cave
Director, Head of UK Defined Contribution
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