Mastertrusts have the next milestone in sight

The number of mastertrusts adopted among FTSE 350 employers has nearly doubled in the past two years to 15 per cent, according to 2017 data from consultancy Willis Towers Watson, and is expected to double again in the next year as low running costs and other advantages see the model begin to outstrip alternative forms of DC saving.

Their success has been catalysed by the dawn of auto-enrolment and the Pensions Regulator’s broader objective of improving governance across DC – a potent combination that has positioned mastertrusts at the vanguard of workplace pensions.

It does start to feel very muddled where consultants' own offering is included

Sharon Bellingham, Hymans Robertson

However, some providers are changing tack with regards to how they prioritise the factors that have seen the market mushroom to this point.

Single-employer schemes looking to save on time and costs present the next wave of growth, and a new tier of offerings are emerging. The market’s recent and future growth promise lucrative pickings for newer players, including consultancy-run mastertrusts.

While new providers enter, the market scale remains king, and not all providers will make the cut; many will fall away or be forced to consolidate with rivals. There are estimated to be more than 100 mastertrusts in the UK, which consultancy LCP predicts will contract to fewer than 30, with between five and 10 holding 95 per cent of members and total assets.

Paul Budgen, director of business development at government-backed mastertrust Nest, says many employers who perhaps have several older existing DC plans including single-employer trusts may be drawn to mastertrusts as a way to “consolidate and rationalise” their pension strategy while reducing the administrative burden.

Employers have also been reassured by the continual rise in the standards of mastertrust governance since the launch of auto-enrolment, with the introduction of accreditations such as the Pension Quality Mark and the Mastertrust Assurance Framework. Sustainability is set to be underpinned further as the role of trustee continues towards greater professionalisation, and the regulator is granted additional powers.

Source: Pensions Policy Institute

“The biggest development is the work that the government is putting into the pension schemes bill,” Budgen says. “The bill sets out a new authorisation and supervision regime for mastertrusts. It intends to address the sustainability of some mastertrusts and the level of member protection in the event of a mastertrust failing.”

Indeed, the regulator views authorised mastertrusts as the “lynchpin” of a sustainable and safe DC market. “For the first time, we will have the power to authorise and de-authorise mastertrusts according to strict criteria,” a regulator spokesperson says.

But these are not the only changes propelling a reordering of the mastertrust market. Tim Gosling, DC policy lead at the Pensions and Lifetime Savings Association, says that for single-employer trusts, while the difficulty in running such schemes amid increasing regulatory pressures exceeds other factors, management costs could also push many employers towards mastertrusts.

“We think that a reduction in the charge cap below 75 basis points is likely to prompt consolidation of single-employer trust-based schemes into mastertrusts… [but] the extent of this is hard to quantify in advance of it happening,” Gosling says.

Consultancies get in on the act

Gareth Sawyer, managing director of workplace solutions at Punter Southall Aspire, says consultancy-run mastertrusts such as Punter's have advantages over some traditional providers.

“The fact that consulting firms are not having to deal with legacy platforms or contracts, or very large populations, and are accustomed to a best-of-breed and whole-of-market approach is clearly to their advantage,” he says.

Unless the DC to DC transfer legislation is amended, in some cases it may not be easy to replace a trust-based scheme with a mastertrust

Richard Sweetman, Willis Towers Watson

Richard Butcher, managing director of PTL, a professional trustee company, agrees that consultancy-run mastertrusts have an advantage in luring existing clients, but says many insurer-run trusts can secure new business through established distribution channels via the adviser community.

However, he cautions that there is a potential for conflict of interest for consultancy-run schemes.

“It’s not unlike the conflict of interest that concerns the [Financial Conduct Authority] in the context of advisory firms having a fiduciary management investment service,” Butcher says. “The advisers will have to be whiter than white.”

Employers seeking independent oversight in assessing providers will help to circumvent such risks. Sharon Bellingham, head of provider relations at consultancy Hymans Robertson, says: “Absolutely there are conflicts, particularly if schemes are tipped over [into] the mastertrust without wider market consideration or assessment.”

Bellingham adds that while consultancies can and do conduct assessment exercises, “it does start to feel very muddled where their own offering is included”.

Despite this, she says many consultancy-run mastertrusts are driving the evolution of the market and provide a “fresher perspective”, including a greater use of technology and emphasis on member engagement. But Bellingham says: “They are often more agile and innovative than the traditional providers but less well-resourced in some cases.”

Downsizing the market, upscaling capacity

In the past five years, 7.5m workers have been auto-enrolled, of which 49 per cent went into a mastertrust arrangement, according to Punter’s Sawyer. The Pensions Policy Institute expects membership of mastertrusts across the UK to grow from a total of 4.8m today to 7.2m by 2030.

Meanwhile, the number of members in existing DC schemes is predicted to fall to 2.1m from 3.8m, over the same period. There are around 35,000 single-employer DC trusts in the UK, a figure widely expected to reduce over the coming years as tighter regulatory requirements and the need to save costs puts pressure on trustees and scheme sponsors.

Consolidation is a theme that will be expressed in two ways: for many employers there will be a desire to tie up legacy arrangements and provide their workers with a single offering; for mastertrusts themselves, scale will be essential for survival and so a flurry of mergers is anticipated. Membership of the smallest 80 per cent of mastertrusts is just 5,000, according to Sawyer, with average assets under management of £67m.

There is an emergence of two tiers of mastertrust that will be key growth areas: a more basic product to serve the still-growing auto-enrolment market; and those targeting employers with existing pension provision, who are perhaps more paternalistic and are making their choices based on more than just price. Additionally, the desire for an at-retirement solution is becoming an increasingly important factor across both.

Barriers to success

Clarification is expected on the issue of DC to DC transfers, which can prohibit some employers from moving their workers into a mastertrust.

Richard Sweetman, senior DC consultant at Willis Towers Watson, says: “Unless the DC to DC transfer legislation is amended, in some cases it may not be easy to replace a trust-based scheme with a mastertrust.”

As well as this, the ongoing success of the mastertrust model rests on there not being any hiccups in the form of a disorderly market consolidation process. PTL’s Butcher says: “The growth of mastertrusts could reverse if there are any public and messy mastertrust failures,” adding: “A lot rides on the pension schemes bill.”