The master trust industry is unlikely to breakeven on costs until around 2025, with the big four providers having already spent £1bn on setting up their offerings, research by the Pensions Policy Institute (PPI) finds.
The research - sponsored by Now Pensions - said the greatest challenge to the financial sustainability of master trusts was the need to cover initial start-up and running costs until levels of membership and assets have grown sufficiently to support the scheme.
It estimated that the cumulative investment into the four largest master trusts was around £1bn by 2019, and said the costs associated with running a master trust would continue to grow due to rises in the costs of investment management and of servicing pots.
It estimated the master trust industry may be operating at a loss until around 2025 but noted this could change depending on the charging model used and whether some master trust providers would look to reduce changes to achieve a competitive advantage going forward.
The report also warned there were a number of known future challenges which are likely to impact master trust costs moving forward.
Key among these challenges was the issue of deferred members. The PPI said small pots belonging to deferred members are likely to become an increasingly important issue as job mobility continues to grow.
The report said that, while active pots are more continuously administered as new contributions are regularly received and allocated, deferred pots present their own administration issues as a result of inefficiencies in administering multiple pots for the same person, or maintaining contact with an individual, without having a current employer to provide contact information.
It said schemes with a greater proportion of pots belonging to deferred members may experience costs that are particularly high relative to their assets under management, as these pots tend to be small and do not grow with ongoing contributions - noting that without policy change the number of deferred pots in master trust schemes could grow from 8 million to 27 million by 2035.
The PPI said the data cleansing exercises necessary for the implementation of pension dashboards were also likely to present additional costs for master trusts, both on an immediate and ongoing basis - adding that, while the cost of dashboards to the master trust industry is difficult to accurately predict, the Department for Work and Pensions estimates that large schemes would face implementation costs of around £200,000 each.
The report also said the coronavirus pandemic could have an impact on costs - noting that reductions in overall contribution levels as a result of increased unemployment and volatility in the stock market were likely to impact master trusts' income from charges, at least in the short term.