Master Trusts invest significantly in their proposition and the benefits of this should rightly be felt by both members and employers. Investment diversity is one such area, but how should Master Trusts approach this and what will future investments look like?

Laying the foundation

There has been much talk and excitement about alternative and esoteric investments (which I’ll call ‘exotic’ for the purposes of this article), but before this is considered, the foundation must be laid by way of suitable ‘governance budget’. This is more than a monetary consideration – a governance budget includes:

Skills, Knowledge & Experience

It’s vital that the Trustee Board/Investment Sub-Committee have the skills, knowledge and experience as well as the time to be able to make informed decisions about ‘exotic‘ investments. This ensures appropriate challenge is provided and means trustees continue to act in members’ best interests. Trustee boards should carefully consider what the gaps are and look to address these – either by training or by bringing in the necessary expertise.

Resource

Another important factor is the ongoing resource required to monitor, review and make decisions – often in a swift and decisive fashion. Trustees are unlikely to be able to do this on a day-to-day basis, so Master Trusts will need to plan for this, perhaps by having a Chief Investment Officer (CIO).

Without an appropriate governance budget, Master Trusts really should not invest in exotics.

Think global, invest local?

Environmental, Social and Governance (ESG) issues have, rightly so, come to the forefront of thinking, and investment strategies should automatically and fundamentally incorporate this, rather than simply being an overlay or just an option. Investments should be made not only in companies that are best in the world, but also best for the world. However, is this enough?

In my opinion, recent events will lead to a greater sense of community and we will see members demanding that investments are put into local projects, be that in infrastructure or local businesses that help the community – leading to ESG becoming ESG+C (Environmental, Social, Governance and Community). Master Trusts should be considering how they can incorporate this potential demand.

A suitable balance must be struck with the traditional asset classes. They still have a major role to play, but there must be a tilt to this, and increasingly savvy members will want their pension to do good within the communities in which they live.

The challenge

I recognise that there are several challenges to investing in exotics including liquidity, charges, and balancing risk and return. I don’t have all the answers, but I’m certain these are not insurmountable, and the Master Trust industry must find a way – after all, Master Trusts, more than any other type of scheme are well positioned to do this. I look forward to continuing the debate!