Master trust authorisation six years on: What has changed and what's to come?

The authorisation regime kicked off in October 2018 with the final batch of master trusts authorised in November 2019.

Schemes had until the end of March 2019 to apply, or they would have been forced to wind up and transfer members to an authorised scheme, unless an extension was agreed with the regulator.

During the process, over half of master trusts decided to cease operating and transfer their members into an authorised vehicle. A total of 44 schemes said they would exit the market while 38 master trusts applied for authorisation.

Aegon head of master trust Antonia Balaam thinks the authorisation regime "significantly raised the bar for governance, transparency and operational rigour".

She says master trusts operate under "far higher standards", not dissimilar to pension providers regulated by the Financial Conduct Authority and Prudential Regulation Authority (PRA), which she says "far exceed" those of single employer trusts.

Balaam says: "This includes high standards for those who support the running of master trusts such as scheme funders and scheme strategists, and the requirement to have business and continuity plans as well as providing evidence of financial sustainability.

"All of this should give members and their employers reassurance that schemes are well-run and resilient."

For master trusts to become authorised, they had to show their schemes met criteria laid out in legislation demonstrating the people running it were fit and proper, the trust was financially stable, the organisation funding the scheme could support it, the master trust had adequate systems and processes in place, and a continuity strategy had been prepared.

Room to evolve

Balaam says while the current regime "sets a strong foundation", there is "room to evolve".

She states: "We support a shift from cost-focused metrics to a broader value framework – one that prioritises member outcomes, engagement, and innovation. The value for money (VfM) framework should help to do this. Regulation should continue to encourage competition and innovation to ensure master trusts are focused on continual improvements in member outcomes and to avoid herd mentality."

People's Partnership head of policy Tim Gosling argues the authorisation requirements "do not need to change", adding: "With the volume of change coming through the Pension Schemes Bill, we think the industry needs time to process the massive volume of work coming through."

Nest director of impact and public affairs Sara Rajeswaran welcomes measures in the bill that seek greater transparency and accountability and require schemes to demonstrate how they are achieving good outcomes for their members.

"As the VfM provisions are established in secondary legislation, it will be important that they continue to promote innovation and value over a long timeframe, with the relevant metrics able to adapt and evolve to reflect this."

Scottish Widows master trust lead Sharon Bellingham says authorisation "should not be considered in isolation and the only lever for increasing value", adding the proposed VfM framework is "a key consideration and part of the broader reform agenda which is focused on improving outcomes for defined contribution (DC) savers".

She adds while the authorisation regime has "largely achieved what it was set up to do", the focus should now "evolve from compliance and consumer protection, to include continuous improvement and innovation in member experience and outcomes".

Market only to become bigger and more consolidated

Since 2019, consolidation has continued apace (see box below) and last year the government confirmed plans for multi-employer DC schemes to operate at ‘megafund' level, managing at least £25bn in assets by 2030. A provider or master trust must provide the regulator with a credible plan to reach the level, if they do not currently hit the £25bn mark, but are worth more than £10bn.

Aegon's Balaam says scheme consolidation brings "many recognised benefits which improve members' outcomes" as well as the benefits of scale and improving VfM.

She expects consolidation to further continue, especially among smaller master trusts that are unable to meet the government's £25bn scale target.

Balaam notes: "The second wave of master trust consolidation has already begun with the realisation that some smaller master trusts will not reach the government's scale requirements in time."

She believes from 2030, the market will likely be dominated by "fewer, larger well governed master trusts with the capacity to invest in their propositions and innovate to deliver good member outcomes".

"We anticipate a market led by a smaller number of large, financially strong providers – probably fewer than 20."

Rajeswaran agrees, noting that, in ten years, "the master trust market will be bigger and more consolidated – to be shaped by the standards reinforced through the Pension Schemes Bill".

She says: "We can already see this trend of a bigger, more consolidated master trust market in Australia, which is home to one of the largest institutional capital pools in the world, with nearly $3trn (£1.46trn) in Australian PRA-regulated assets and a strong allocation to unlisted assets, such as infrastructure, private credit and private equity."

Rajeswaran adds: "Large, well-governed schemes can drive greater outcomes for their members – using their scale and expertise to diversify where money is invested and gain access to attractive investment opportunities.  

"When you're investing billions rather than millions, schemes can more readily access private market investments like infrastructure and property, which can deliver stronger long-term returns and play a role in supporting communities in the UK.

"Large, growing pension schemes tend to be the most patient owners when it comes to deploying significant amounts of capital."

Rajeswaran adds Nest expects consolidation in the master trust market to continue. "Operating at scale requires significant investment in governance, technology, and investment expertise to ensure consistently strong outcomes for members. The Pension Schemes Bill reinforces these expectations by placing greater emphasis on governance standards, risk management, and long-term sustainability."

Scottish Widows' Bellingham says: "To truly support members in a holistic way, regulation must evolve. The current frameworks are heavily focused on scheme resilience and compliance and a shift toward enabling innovation will be welcomed."

Consolidation beneficial but regulation should shift

Bellingham adds that another notable benefit of consolidation is strong governance.

She says that master trusts are overseen by an independent trustee board, largely made up of professional trustees. As well as being subject to the authorisation regime, they are subject to ongoing supervision by The Pensions Regulator, which ensures high standards.

Bellingham says outsourcing to a master trust is likely to "reduce cost, risk, and complexity for employers, while providing employees access to a well-run and well-governed workplace pension".

She explains: "The pooling across multiple employers allows for economies of scale, reduces administrative and investment costs compared to running a standalone trust-based arrangement.

"Connected to scale and pooling, master trusts can support access to sophisticated investment strategies at highly competitive charges, access to digital tools, support for vulnerable customers, good quality engagement across a range of media and helping members make more informed retirement decisions.

"As regulatory expectations rise, master trusts are well-positioned to adapt, innovate, and deliver long-term value which makes them a sustainable choice for the future."

She adds while there are ever-increasing disclosure and governance requirements for master trusts, they are also facing mounting pressures of their own, which creates an "interesting dichotomy and a question about market capacity".

"On the one hand, demand for master trusts will continue to grow as trustees and employers seek scale, efficiency, and improved member outcomes. On the other hand, the number of providers is expected to contract.

"We need to be mindful of potential challenges as a result of market consolidation, the departure of sub-scale providers and a very demanding pension change agenda, driven by policy reform."

People's Partnership's Gosling says: "International evidence shows an association between scale and scheme performance. Bigger isn't always better but scale enables schemes to internalise more of the asset management function and generate scale economies in administration."

Gosling thinks consolidation will continue in the future, but largely due to measures in the Pension Schemes Bill as opposed to the authorisation regime.

He notes: "WPI Economics estimates a sharp further contraction in the workplace pensions market with between four and ten master trusts and six group personal pension (GPP) providers in its central estimate. This assumes that government legislates for a requirement of £25bn AUM in order to remain in the market."

He adds if the WPI is right, "we expect sharp consolidation with far fewer master trusts and GPPs" within the next ten years. He suggests remaining schemes will offer a decumulation product and will invest much more in a wider range of asset classes, including domestic investment in private markets.

"This market will remain intensely competitive, but the competitive focus is likely to have moved away from price. Price will still be a relevant factor but the forthcoming VfM metrics will shape the way schemes compete as well as well as setting a floor for quality in the market," he adds.