In 2010 200,000 people were saving for their retirement in a master trust. In 2020 the Pension Regulator (tPR) reported there being 16.6 million master trust members, holding £38.5 billion of assets 1. So, what’s the attraction?
A big driver of member numbers is undoubtedly the master trusts competing for the automatic enrolment market, but there’s considerable growth in the number of master trusts being used as a solution by employers who previously operated their own occupational pension scheme (OPS) or workplace personal pension too.
For these employers we see a mixture of push and pull factors driving change. Employers are turning away from the increasing burden of running a scheme themselves, while recognising the qualities of master trusts.
Increased governance requirements
As UK defined contribution (DC) pension schemes have grown in importance, so we’ve seen governance requirements to grow too. The role of pension scheme trustees is more complex than ever, increasing the time spent on governance, compliance, and the bill for professional advice.
Guidance from tPR 2 makes it clear that expectations of trustees are high, while their DC Scheme Survey 3 makes it clear that many trustee boards are falling short. The Department for Work and Pensions has already signalled that they will introduce a prescribed method of assessing value for scheme members 4, to address perceived failings within smaller pension schemes.
Those trustees who can’t achieve a pass mark will be expected to wind up their scheme and move members to a larger scheme. One option is obviously a master trust.
The increased cost of OPS
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, increasing administration costs for unbundled schemes.
Master trusts can be a destination for deferred members, but this kind of “sweep out” might not be a long-term solution. Master trusts have to be sustainable and may be reluctant to accept a disproportionate number of very small pots. Many of the master trusts focussed on the automatic enrolment market have a small pots problem of their own.
Economies of scale
New requirements for trustees to report on how they’ve taken Environmental, Social and Governance risks and particularly climate related factors into account make it clear that investment expertise, professional advice and access to suitable solutions are baseline expectations.
The scale of master trusts means that expert advice and in-house expertise is more affordable, something we believe will be increasingly important as pension schemes navigate a path from investing in a world economy based on carbon, to one based on clean electricity.
In the more immediate term, an increased focus on long term investments in infrastructure, and other illiquid investments, may be something more easily delivered in master trusts with £billions rather than £millions to invest.
The scale of master trusts has meant 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 the master trusts can mean that drawdown solutions can be made available with lower charges than would otherwise be available to members. Something that’s proved attractive to trustees seeking 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 the whole, or part, of their DC scheme membership to a master trust (subject to scheme rules). This makes the wind up of 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 OPS for years may also recognise the importance of being able to request a transfer of all benefits out of a master trust (subject to scheme rules and the approval of the master trust trustees). This provides reassurance that they’re not making an irreversible decision, and allows them to maintain the leverage of 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. This is less than half the number that existed in 2017, but we expect numbers to reduce further in the years to come.
The Pensions Regulator’s ongoing supervision regime ensures that standards are maintained 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 ensures that this should be an orderly process but choosing a successful master trust backed by a strong sponsor means you avoid any potential disruption.
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 when it comes to fund performance net of charges, to member communications and options within the pension scheme, to 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 DC pensions, schemes make a difference to what retirement looks like for members.
Given all we’ve talked about, more employers and trustees are concluding that master trusts can make a difference.
The importance of advice
It’s important that employers and trustees recognise that authorised master trusts aren’t all the same.
Authorisation sets a high bar with regard to 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.