What’s driving the move to master trust?

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And what is the attraction?

In 2010, 200,000 people were saving for their retirement in a master trust. Fast forward to 2022 and the Pension Regulator reported 20.7 million master trust members, holding £78.8 billion of assets 1. So, what’s the attraction?

One of the key drivers for member numbers are those master trusts set up for the automatic enrolment market. However, there's been considerable growth in the number of of master trusts being used as a solution for employers who previously operated their own occupational pension scheme or workplace personal pension.

For these employers, we see a mixture of push-and-pull factors driving change. Employers don’t want the constantly increasing burden of running a scheme themselves, and are recognising the qualities of master trusts.

Dealing with increased governance requirements

As UK defined contribution pension schemes have grown in importance, so we’ve seen the burden of compliance weighing heavier on scheme trustees. Complexity and increased expectations mean trustees need more time and more professional advice if they are to stay on the right side of the Pension Regulator.

The Regulator’s proposed new Code of Practice makes it clear that expectations of trustees are high, while their Defined Contribution Scheme Survey 2 shines a light on how many are falling short. The Department for Work and Pension’s new requirements for assessing value for scheme members 3 make no bones about the fact they expect many pension schemes to conclude they are not offering the best value for members, and to wind-up.

When it comes to transferring accrued assets and paying future contributions, one option is obviously a master trust.

The increased cost of occupational pension schemes

High quality governance comes at increased cost, but it’s not only the cost of governance that’s increasing. The abolition of short service refunds in October 2015 led to an explosion of small pots in schemes with high turnover, which increased administration costs for unbundled schemes.

Master trusts can be a destination for deferred members, but this might “sweep out” might not be a long-term solution. Master trusts must be sustainable and may be reluctant to accept a disproportionate number of very small pots. Many master trusts focus on the automatic enrolment market have a small pots problem of their own.

Economies of scale

Larger master trusts benefit from economies of scale which mean they’re more capable of funding the level of governance demanded by regulations now and in the future.
Scale also gives master trusts access to efficiency savings around scheme administration. There’s a clear potential to deliver better performance net of charges.

Investment expertise 

Trustees must now report on how they’ve taken environmental, social and governance risks – and particularly climate-related factors – into account. These new requirements make it clear investment expertise, professional advice and access to suitable solutions are baseline expectations.

The scale of master trusts means expert advice and in-house expertise is more affordable. We believe this will be increasingly important as pension schemes move from investing in a carbon-based world economy to one based on clean electricity.

Another key development within scheme investments is the focus on enabling long-term investments in infrastructure and other illiquid investments. This may be more easily delivered in master trusts with £billions, rather than £millions, to invest.

Retirement options

The scale of master trust means that many have been able to offer a more complete member journey from work into retirement. It’s a demand own trust schemes have struggled to meet, and a problem employers and trustees are increasingly looking to master trusts to solve.

Well-governed options within master trusts can lead to drawdown solutions with lower charges than would not otherwise be available to members. This has proved attractive to trustees looking to offer a preferred master trust provider for their members.

Employer and trustee reassurance

The role of a trustee is the same whether they form the board of a master trust, or a single employer trust. They’re required by law to act solely in the members’ interests. This can provide reassurance for existing scheme trustees, employers, and members alike.

Ease of transition

Regulations allow trustees to transfer all or part of their defined contribution scheme membership to a master trust (subject to scheme rules). This makes winding up an existing scheme easier, but also offers solutions to reduce the number of deferred members, if this is the trustees’ aim.

Employers who’ve funded their own occupational pension scheme for years may also recognise the importance of transferring all benefits out of a master trust (subject to scheme rules and the approval of the master trust trustees). This offers reassurance that they’re not making an irreversible decision and allows them to continue leveraging their entire membership when negotiating the best deal for their workforce.

The impact of authorisation

Only 38 master trusts managed to satisfy the Pensions Regulator’s exacting standards for authorisation, less than half the number that existed in 2017. Since then, numbers have reduced to 36 4, and we expect the number to decline further.

The Pensions Regulator’s ongoing supervision makes sure master trusts maintain standards and adds an additional layer of scrutiny to business plans. Those who let standards slip or who fail to meet sustainability targets are likely to look to consolidation as a solution.

Authorisation means this should be an orderly process but choosing a successful master trust backed by a strong sponsor means you avoid any potential disruption.

The importance of advice

It’s important employers and trustees recognise authorised master trusts aren’t all the same.

Authorisation sets a high bar for all aspects of scheme governance, but it doesn’t deliver a qualitative assessment of the whole proposition.

Advisers with experience across the market play a central role in assessing the needs of employers and providing an invaluable assessment of the relative merits of the master trusts, and workplace personal pensions, available to them.

Why change?

We’ve talked about the push-and-pull factors around master trusts, but the real reason to consider changing is to improve the lives of people in later life.

Governance exists to make a difference to:

  • fund performance net of charges
  • member communications
  • retirement options within the pension scheme
  • the decisions people make about how much to pay in, and when and how to take money out.

By making a difference to these building blocks of defined contribution pensions, schemes make a difference to what retirement looks like for members. And more employers and trustees are concluding that master trusts can make that difference.

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