At the start of 2018, 9.9 million members and over £16bn of assets were invested in 81 master trusts. This is up from just 0.2 million members in 2010. So, what’s driving this move to master trust?
The main driver in terms of members is undoubtedly the handful of very large master trusts competing for the automatic enrolment market. But that’s just part of the story. Master trusts are increasingly being used as a solution by employers who previously operated their own occupational pension scheme (OPS).
We think there’s a mixture of factors pushing employers away from running their own OPS and pulling them towards a master trust solution.
Increased governance requirements
Governance requirements for all defined contribution (DC) schemes have ratchetted up, making the job of trustees more complicated, increasing the time they need to devote to their DC scheme and the cost of advice they require.
The Pensions Regulator’s (TPR) guide to the Chair’s Statement made it clear that they expect high standards of governance, and trustee workloads are continuing to increase. New reporting on data quality and online disclosure of all charges are the focus for 2018. Environmental, social and governance (ESG) considerations are to be incorporated into reporting from 2019.
The increased cost of OPS
The pressure isn’t only on governance. The abolition of short service refunds in October 2015, has led to an explosion of small pots in schemes with high turnover, increasing third-party administration costs.
Economies of scale
Economies of scale mean that a master trust may be more capable of delivering what regulation demands around governance. They may also be able to absorb the cost of future change.
In addition, scale gives master trusts access to savings around scheme administration as well as access to investment expertise. It also grants master trusts the potential to offer a more complete member journey from work into retirement, through the provision of a drawdown option within the scheme.
This is a member demand many own trust schemes have struggled to meet.
Employer and trustee reassurance
A master trust’s board is bound to focus solely on the members’ interests, which can provide reassurance for existing scheme trustees around conflict management.
The ability, subject to the due diligence of the transferring trustees and their advisers, to transfer the whole of an employer’s existing scheme to the master trust makes the wind up of an existing scheme easier. This is attractive to employers and trustees alike, but the ability to also bulk transfer a master trust section to another scheme (subject to scheme rules) is equally attractive.
Employers who have funded their own OPS for a considerable time may realise the importance of maintaining the leverage of their entire scheme, including deferred members, if it were required in the future.
The impact of authorisation
The authorisation and oversight regime that applies to master trusts is something that we believe will provide additional reassurance to employers, employees and trustees.
While master trusts, other than those backed by an insurer, will never be able to offer the same reassurances around sustainability that can be provided through a workplace personal pension, the knowledge that members’ benefits cannot be degraded by increased charges, and that any wind up will be orderly, can only help reassure all stakeholders.
Those employers and trustees looking to move to a master trust should ensure that they engage an adviser with experience across the market. Authorisation, the TPR Master Trust Assurance and the Pensions and Lifetime Savings Association’s Pension Quality Mark Ready accreditations cover a range of attributes, from the trustees’ governance capabilities, to the quality of member-facing communications. However, even with all of these standards, advisers maintain a central role in assessing the needs of employers and the relative merits of the master trusts and workplace personal pensions available to them.