In 2010 200,000 people were saving for their retirement in a master trust. In 2019 the Pension Regulator reported there being 13.9 million master trust members. So, what’s the attraction?
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) or even a workplace personal pension.
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 makes it clear that they expect high standards of governance and trustee workloads are continuing to increase.
Requirements to report on what trustee boards have done to mitigate the risks presented by environmental, social and governance (ESG) factors increase during 2020.
2020 could also see the introduction of a consolidate or explain regime, as Government and the Regulator look to reduce the risks that inadequate governance pose to members.
The increased cost of OPS
The pressure isn’t only on governance. The abolition of short service refunds in October 2015 led to an explosion of small pots in schemes with high turnover, increasing third-party administration costs.
Master trusts have become a destination for a transfer of deferred members, but this might not be a long-term solution. Master trusts may become reluctant to accept ongoing transfers if there’s a disproportionate number of small pots.
Economies of scale
Economies of scale mean that a master trust may be more capable of delivering the level of governance demanded by regulation. They may also be able to absorb the cost of future change.
Scale also gives master trusts access to savings around scheme administration as well as access to investment expertise. There’s a clear potential to deliver better performance net of charges.
The scale of master trusts has meant that many have been able 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, and a problem employers and trustees are increasingly looking to master trust to solve
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 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 part of a scheme to master trust (subject to scheme rules) is equally attractive.
Employers who’ve funded their own OPS for years may also recognise the importance of being able to request a transfer of all benefits from the master trust (subject to scheme rules). This allows employers to maintain the leverage of their entire scheme 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 at the beginning of the process.
While this provides a ringing endorsement of the standard of governance, administration and IT controls, and the financial backing of authorised master trusts we expect master trust numbers to continue to contract.
The Pensions Regulator’s ongoing supervision regime will ensure that standards are maintained and add an additional layer of scrutiny to business plans. Those who let standards drop or who fail to meet their target market share are likely to look to further consolidation as a solution.
It’s important that employers recognise that authorised master trusts aren’t all the same. Authorisation sets a high bar with regard to scheme governance but 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.