What is the ‘end game’ for master trusts?
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Rapid growth is causing concern
The rise of master trusts is well documented. Since auto enrolment was launched they have proved to be a good solution for companies who need a workplace pension scheme but don’t want to manage all the governance that goes with it.
They are proving popular. In 2017, the Aviva Master Trust saw its AUM grow substantially and we’re getting a lot more enquiries from large, multinational corporations. However, the side effect of the ‘light touch’ regulation around master trusts is that there is now a lot of them – over 80 in fact.
Competition can be healthy – it can drive up standards and drive down costs. But, to be frank, making money from pensions is hard. Auto enrolment introduced millions of new savers but their contributions are low and there is a charge cap of 0.75%. Costs around administration and governance of pension schemes are high, and increasing. The big challenge facing master trusts is sustainability. There simply isn’t the market out there for over 80 master trusts to be profitable. Viable schemes need scale. You need lots of employers and lots of members paying in every month.
The Government has grown concerned that master trusts could fail. Some don’t have the same protections that come from using a regulated pension provider, putting their members’ retirement savings at risk. Regulations setting down the rules for master trust authorisation will come into force on 1 October 2018, bringing with them rigorous requirements that must be met along with an authorisation fee of up to £41,000.
When over 80 become 10
2018 is likely to be a year of consolidation in the master trust market. Smaller providers are going to realise pretty quickly that they have bitten off more than they can chew. Their costs are outstripping their revenue and reality isn’t matching their business model. Schemes will have to make difficult decisions, or have the Regulator make decisions for them.
Even if the decision has been made that a master trust is no longer sustainable, the challenges continue. Failing trusts will need to give notice to the employers using them for auto enrolment and offer them a transfer to a default alternative scheme but there is nothing to say that the employers will want to go there.
Employers in failed master trusts are likely to want the comfort of knowing that lightning won’t strike twice, and choose a well established name. The default provider may find they are left to transition the least engaged employers onto their platform. There is a real risk that absorbing another master trust’s book of business isn’t necessarily going to be an attractive proposition.
This is a pretty stark message, but it is the reality, and a reality that has been public for some time.
Employers and their employees signed up to master trusts looking to comply with auto enrolment regulations and to give savers the chance of a better retirement. The new regulations should mean that members of master trusts that are closing down are not disadvantaged, and that their employers are able to choose the provider that best matches their business need.
And when the consolidation period is over?
According to Dominic Fryer, head of workplace pensions at Aviva, "There is probably enough room for around 10 master trusts. These would be large enough to be profitable, have strong governance procedures in place, have slick and efficient administration and above all else offer value for money for employers and members."
The future is bright for master trusts, but it’s a future with fewer of them.
To discuss this further, please get in touch with your Aviva contact.