Authorisation will lead to higher standards for all master trusts but their individual identities will remain, according to industry experts
At the beginning of last month, the starting pistol was fired on master trust authorisation, beginning an era when multi-employer defined contribution pension schemes must continuously prove they are able to always comply with a far stricter regulatory regime.
The Pensions Regulator (TPR) is using this process to improve sustainability of master trusts overall, and it has made it clear it will focus on "quality" of trusts. For this reason, it has already stated that confirmation of any master trusts seeking authorisations is likely to take time.
Hymans Robertson senior consultant Sharon Bellingham describes the authorisation requirements as "immense", adding: "It's no mean feat even for those doing a great job. Authorisation is not once-and-done - there will be on-going supervision."
Part of the scrutiny is due to the fact all schemes looking for authorisation will have to satisfy all of the criteria regardless of size - even those trusts ones backed by a Solvency II regulated insurer, for example.
"The provider will have to prove themselves at every point," explains Aviva workplace pensions policy manager Dale Critchley. "Providers need to commit to funding the scheme during loss-making periods and create a contingency plan for even the most unlikely events. It's not always easy to prove what might have been considered a given, which is why schemes are deciding that it's better to put a more complete application in later, than rush to put it in first."
In addition to the £41,000 fee, the provider must allocate money to ensure that members' benefits are secure if it goes into liquidation. Using the simplified model, £75 per member needs to be held as assets accessible to the trustees. "If there are a lot of members, that is a lot of money for a trust to hold at any one time," adds Critchley.
Master trusts following TPR's Code of Practice 13 already have a head start: "Some trustee boards have regarded the code as a nice-to-have rather than a must-have," he says. "And for those that have cut corners, governance costs are likely to increase. The business case may no longer add up for some trusts and we've seen some close already."
Impact on master trusts
What will be the impact of the new authorisation rules on the sector? Indeed TPR confirmed on 1 October that of the 87 master trusts, at least 30 will not seek authorisation. But Hymans Robertson Bellingham has "no doubt this will increase during the six-month authorisation window".
The lowest estimate is for there ultimately to be as few as ten, but most expect as many as between 20 and 30 trusts will continue with the process to authorisation. Deloitte pensions director Will Aitken says: "The ones that disappear will largely be those that don't have a huge number of members, so the market will not demonstrably change. The corner shops may close but the supermarkets will stay open."
However, Barnett Waddingham partner Mark Futcher believes that smaller providers can still capture economies of scale: "It's not necessarily the master trust that needs scale - as long as it's based on infrastructure that has scale. Some unbundled master trusts, driven by consultants, have interesting propositions."
TPR is also expected to make sure that, on closure, a default plan of action is presented. "Employers will not be left high and dry - but they can decide to do whatever they want," says Bellingham. "Changing provider is not onerous if they are well supported."
Futcher believes the process highlights an opportunity and trustees should definitely shop around. He explains: "Changing can be costly so trustees need to make sure it's viable for the foreseeable future - moving regularly undermines pensions' validity as a long-term savings vehicle."
Yet Aitken believes the secondary market is far more appealing as "taking on an employer scheme may mean hundreds of millions of pounds in one swoop" and is therefore it is more competitively priced.
Solvency II makes the risk of an insurer master trust going bust much lower, according to Aviva's Critchley. "It gives greater certainty that, if the worst happens, there are failsafes in place for members' security. Authorisation simply adds another layer of protection. It's a set of braces, to the belt that's already there."
Aitken adds: "For insurers, it is a natural extension of what they already do. For others, where the master trust is its only product, we have to hope it gets to critical mass."
With the market in flux it is still possible for existing or even new entrants to stake a claim for a section of the market "perhaps by doing something differently around communication, digital or decumulation," says Bellingham.
TPR's 2018 Retirement Outcomes Review recommended making drawdown much easier to understand. "We see the main differentiator outside the authorisation framework - in at-retirement options, says Futcher. "There hasn't been much innovation so far but some master trusts are talking about ways to stop members running out of money - that is the next big challenge. I think it's got to become part of authorisation in the future."
Aitken expects greater differences in engagement. "Some will target messaging much more individually, which we know has a strong impact."
Critchley says: "Decumulation is an area where master trusts can take a lead - that's where we will see evolution. Aviva is also making the customer journey digital, as customers want to engage with interactive tools online. Longer-term, we will see master trusts using scale to introduce different investment solutions. We will certainly start to see more differences between master trusts."