The master trust market has grown rapidly in recent years but does face challenges says Daniel Shaw and Alison Guy
- The appeal of master trusts rests on a one-size-fits-all approach. However, can one scheme really suit all employers?
- No official list of providers exists but there could be as many as 70 master trusts currently in operation
- TPR developed a voluntary assurance framework to help employers find a good quality master trust
Master trusts: one trust, many unrelated employers. The concept is beautifully simple; the reality far more complex. These DC schemes offer employers the chance to tick auto-enrolment off the list, but keep the PR department happy with a trust-based scheme and strong governance credentials.
As the new kid in town settles in for the long haul, key challenges are emerging that are entirely specific to master trusts. Master trusts are not simply DC schemes in master trust clothing – they are an entirely different animal. Their appeal is often based on the ease of ‘one size fits all', but can one scheme suit every employer? As regulation and competition increase, time will tell which are up to the challenge (and the smart money is on the biggest fish).
This is a very young market that has undergone rapid expansion in the last couple of years. The major players (NOW: Pensions, NEST and The People's Pension) have only been open for business since 2011 and barriers to entry have historically been very low. While no official list of providers exists, Professional Pensions sought to compile a definitive list in August 2015; it identified 57 known providers, and there could be as many as 70 master trust providers in the UK. Employers must try to differentiate between many offerings that are of widely varying quality and sustainability.
The Pensions Regulator (TPR) took significant steps in 2015 towards helping employers identify an appropriate provider in the master trust world. It had developed the voluntary master trust assurance framework with the ICAEW back in May 2014, with initially limited take up – only NOW: Pensions and The People's Pension obtained independent assurance that their governance and administration was up to scratch.
In July 2015, TPR reconsidered its decision not to publish a public list of those that had met the standard. Three more master trusts obtained assurance during 2015 and it seems increasingly inevitable that all will need to follow suit to remain competitive.
Legislation came into force in April 2015 to address TPR's concerns about conflicts of interests. Originally, providers often set up master trusts on a bundled basis, usually appointing the trustee and providing various administrative or advisory services.
TPR and DWP agreed that the lack of trustee independence from the provider could lead to poor member outcomes. As a result, now the scheme's Trust Deed and Rules cannot restrict the choice of service providers, and the majority of trustees (with a minimum of three trustees in place) must be independent, and can only count as independent for a maximum term of ten years. The challenge is now to demonstrate that these standards have been met and schemes must report on them at the end of the year in the Chair's annual statement.
As a result of the unusual structure of master trusts (one trust, one provider, one set of trustees, but potentially thousands of unconnected employers) certain practical challenges have emerged, with no easy solutions. Given the scale of the operations, and sheer number of employers and members involved, it is not uncommon for contributions to be paid late, in error, or not paid at all. Yet the reporting obligation if contributions are late is just the same, as are the trustee's legal obligations to chase up late payments.
A typical pension scheme might adhere one new employer a year, whereas a successful master trust adheres hundreds every week. Should this be done by deed for each new employer, or can an electronic 'one click' contractual approach work?
Further issues for employers to consider are the fact that the default fund will not be chosen by trustees who are familiar with their membership – far from it. How can it be possible for a default fund to be appropriate for more than one million members, all from diverse industries and with different ages and earning capacities? Finally, employers need to have one eye on the exit, as some master trusts have no mechanism to bulk transfer out members once they are in, if the scheme does not perform as expected.
Rapid growth in the last four years has been fuelled by a steadily increasing market of employers who need providers. That dries up in 2018 once auto-enrolment has been rolled out. After that only acquisition will fuel growth. As sure as bust follows boom, the smaller players will eventually be gobbled up like so many Pac-Man ghosts. Consolidate or be consolidated – who will survive?
Daniel Shaw and Alison Guy are senior associates in the pensions team at CMS Cameron McKenna
Phoenix Group will launch an ESG defined contribution (DC) default solution for pension fund clients of its Standard Life Assurance business and their scheme members.
Newton’s Curt Custard considers the investment outlook for 2021 and the implications for DC schemes
Master trusts’ investment strategies have grown and become more sophisticated over the last three years, but “growing pains” are hindering progress, according to the Defined Contribution Investment Forum (DCIF).
More than half of BlackRock’s flagship UK defined contribution (DC) default fund’s assets will be invested in ESG strategies by June 2021.