DC master trusts: A consolidation conundrum

For some years now, policymakers have sought a consolidated master trust environment that powers both the defined contribution (DC) pension market and investment in the UK economy.

In her first Mansion House speech last month, chancellor Rachel Reeves set out plans to create DC “megafunds” by removing barriers to consolidation among master trusts and other forms of DC pension scheme.

These measures should complement the proposed Value for Money framework being developed by the Financial Conduct Authority and the Pensions Regulator (TPR), which relies upon poorly performing schemes being able to easily transfer members in bulk to better arrangements.

While the chancellor hailed these plans as “the biggest set of reforms to the pensions market in decades”, in truth these consolidation plans have been a long time coming.

Raising standards, maintaining choice

In 2018, the previous Conservative government introduced a regulatory framework for master trusts, mandating that only those authorised by TPR could operate in the UK.

This regime prompted sweeping consolidation in the sector. There are now 36 master trusts, according to Aviva, which is less than half the number that were operational in 2017.

In 2023, the previous government said that the market could balloon from around £140bn that year to approximately £420bn in 2030 in real terms. The current administration believes this figure could be nearer £800bn.

In any case, these forecasts anticipate a future in which a few very large master trusts are active and dominate the sector, alongside several smaller trusts.

“There needs to be enough choice maintained in the market so that it still encourages innovation across the master trusts and development of the product,” WTW senior consultant Gemma Burrows says. “At the end of the day, that’s what the individual is going to benefit from.”

“There also needs to be choice for those employers that perhaps would struggle to find terms from a commercial master trust,” she continues. “Many of the providers in the market at the moment will have a specific target employer and scheme type that they want to attract into the master trust.”

Efforts need to be made to ensure that those employers seen as less desirable still have a destination, she says.

Consolidation may hamper client service

Aon market development lead Nigel Aston says there are two routes to consolidating master trusts.

“The easier way is to move members and assets onto your existing platform and, while this is a substantial initial exercise, the long-term additional workload is limited,” he says. “The second option is taking over a whole existing infrastructure and then transitioning platform and processes over time.”

“The latter can take years, is very complex and doesn’t give immediate economies of scale,” Aston continues, adding that “it is also possible to run parallel propositions in tandem, as long as they are differentiated in approach and target market – smaller clients and larger ones, for example”.

This latter approach has been used by master trusts including Smart and NatWest Cushon. Cushon acquired the Workers Pension Trust, a Northern Ireland-based pension scheme, in 2021, with the merger finally completed earlier this year.

Aston says that the first consideration for those weighing up consolidation is to determine whether there is actual value in such a deal.

“Master trust valuations have tended to be high and initial cost must be balanced with longer term ambitions about savings through increased scale and/or leveraging new services, markets and income streams,” he says.

“The most complex element of any integration is then the integration and rationalisation of operational platforms, processes and people. The significant amount of extra governance and reporting involved should not be underestimated,” he continues.

Aston warns that “with resources focused on integration, it’s possible that ongoing organic growth, proposition development and client service may receive less attention”.

Master trust mergers ‘could be made easier’

Natwest Cushon head of policy and research Steve Watson believes that “there are definitely levers the government can pull to make consolidation a lot easier for active firms like us in the market”.

“The actual merger of master trusts could be made a lot easier,” he argues. “The current regulations do not specifically deal with the consolidation of master trusts. That means we have to shoehorn into a triggering event, such as ‘Continuity Option 1’.”

This is “effectively a similar process to winding up an occupational scheme, with some additional requirements”, Watson explains, noting that “this is not ideal” as “it doesn’t provide a smooth or easy way to migrate members from one master trust to another”.

“Crucially, the required communications to members can be disconcerting, which is not ideal,” he adds

Smart Pension chief executive officer Jamie Fiveash believes that “some thinking does need to happen to help extend consolidation to more complex trust scheme structures”.

He also emphasises the need for consideration as to how contract-based schemes can be moved on a bulk basis when it is in the best interest of customers to do so – another crucial element of the Value for Money regulatory framework.

“At the moment for a contract-based scheme to be transferred it requires the specific consent of each policy holder,” he observes.

“Because of this, there are potentially millions of customers in such schemes stuck on old technology and with old investment strategies, that would benefit from a bulk consolidation process not reliant on individual consent.

“Some regulatory change will be needed in this space to move small pots and for the Value for Money framework in any case, so I would encourage policy makers to think about the regulatory changes needed now.”

Further reading

Smart Pension to acquire Options master trust (16 July 2024)

Cushon consolidates Workers Pension Trust in master trust first (1 February 2024)

Smart Pension buys Evolve Pensions for undisclosed sum (17 July 2023)