Duncan Howorth says consolidation in the master trust market is nothing to be frightened of.
Much has and continues to be said and read about master trusts, leading unfortunately to the impression that these pension saving vehicles are unstable, unproven and risky for savers. How wrong could that be?
First, trust based pensions have been the backbone of UK pensions for years. They have proven to be resilient, flexible, provide strong governance and are responsive to changing needs as well as delivering effective outcomes. No wonder 85% of companies enrolled and enrolling under auto-enrolment (AE) are doing so through master trusts.
Second, master trusts have been around for quite some time - they are not an (AE) phenomenon. Many are now large, sustainable and successfully serve specific sectors or consumer groups. These will continue to serve their clients and members as they have done for many years.
However, some of these trusts have tried to adapt to serve (AE) and are having operational challenges. We shouldn't be surprised at this given complex AE rules and the impact of the charge cap. These long established trusts represent perhaps 25% of the 100 or so master trusts believed to be operational and " open for business ".
Other master trusts are relatively new, and have been created by existing pension advisers or providers as an alternative to group personal pensions and individual trust based DC schemes, but also with an AE solution in mind. These are just one piece in the armoury that these companies have as solutions to clients.
Some master trusts, of course, are brand new and have emerged purely as a result of AE - and can represent the single focus and business activity of the sponsor. This is not unusual.
When an attractive market expands exponentially through a change in legislation, as in any other walk of life, it will attract new players with new propositions, with the vast majority well intended to serve their targeted client base.
A different approach
These new master trusts seek to provide something different - they will need to if they are to succeed. As is so common in business today, some seek to disrupt the industry; delivering technology in a way that makes life easy for everyone, and lowers the cost.
All this creates choice for employers; competition for the established players and, in a market economy, is good news for everyone including savers. This latter group of master trusts represent perhaps 25% of the universe.
Why all this talk of failure? Some existing industry participants might like to see these last two groups fail; they represent a challenge to the return on significant investments made by some providers. Some may believe that master trusts are not the way ahead, preferring the model that delivers more sticky business and a lifetime relationship with members. Some rightly highlight the risks to members if savings are exposed to loss. But the talk of failure is over done.
Will all these new master trusts succeed? No. It should be expected that there will be those that win and, well, some that will not. It is quite normal to see consolidation in a market that has been subject to new entrants and disruption - clients will make their choice and the dynamics of the market will come to play and the stronger will consolidate others. Indeed quietly there have been one or two consolidations already where a clear, efficient and "no loss to members" process has been completed - under the watchful eye of the regulator.
The steps being taken to ensure that master trusts are effective in delivering sound outcomes for members are to be encouraged. No one wants to see a failure. If these steps raise the bar for higher levels of capital and other protections, then one consequence might be consolidation.
Trustees have an important role to play in ensuring consolidation comes before it is too late. They are charged with governance that looks not just at process and controls but also at sustainability. Consolidation should be more effective at protecting members than winding up a trust.
The regulator should not be afraid to intervene early to avoid headline grabbing details that undermine the success that AE is today.
We will no doubt witness a number of consolidations; but we don't want to see any failures.
Duncan Howorth is a director of Smart Pension Ltd
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