The number of individuals saving into master trusts has grown exponentially since the introduction of auto-enrolment - with The Pensions Regulator (TPR) estimating the membership of these schemes has grown from just 270,000 at the beginning of 2012 to just over 13.9 million at the end of 2018 (see Chart 1 below), with in excess of 7.7 million actives.
The total assets of such schemes were just under £30bn at the end of last year but are rising fast as minimum total contributions increased from 2% to 5% in April 2018 and from 5% to 8% in April this year (see Chart 1).
The growth in the number of master trusts in the market has also been rapid - with TPR reporting that there were a total of 74 master trusts in existence at the end of 2018, many of which were intended to be for-profit, commercial operations. However, concerned about the unchecked growth of the market, the government decided to regulate the market more strictly - giving the regulator responsibility for authorising and supervising master trusts under the framework put in place by the Pension Schemes Act 2017. The master trust authorisation regime came into force on 1 October last year, marking the start of a process that is likely to take until the end of this year to complete.
Supervision is an integral part of TPR's new approach to working more closely with a greater number of pension schemes across a range of areas, not just master trusts.
Master trusts were given six months to apply for authorisation and show their scheme met the five criteria laid out in legislation - demonstrating the people running their scheme were fit and proper; the master trust was financially sustainable; the funder of the scheme could support it; the master trust had adequate systems and processes in place; and that a continuity strategy had been prepared. Any master trust that opted out of applying for authorisation - or those which fail to meet the required standards following application - will be required to wind up and transfer their members to an authorised scheme.
By the 31 March deadline the regulator had received 30 applications for authorisation and had granted 10 master trusts a six week extension, eight of whom eventually applied. At the time of going to press on this supplement (14 June), a total of six master trusts had been authorised, including the Bluesky Pension Scheme, The Crystal Trust, LifeSight and USS Investment Builder as well as Legal & General's two WorkSave master trusts. There has also been one application for authorisation from a new master trust (see Chart 2).
Following a master trust's application for authorisation, the regulator has six months to decide if it meets the standards required - and it is updating the market on progress on a monthly basis. To see the latest list of authorised master trusts, visit: www.professionalpensions.com/2352950
After a master trust has been authorised, it will then be subject to the regulator's proactive supervisory regime to ensure it continues to meet the criteria. TPR head of master trust authorisation and supervision Kim Brown explains:
"Supervision is an integral part of TPR's new approach to working more closely with a greater number of pension schemes across a range of areas, not just master trusts. By working proactively with schemes through a range of new approaches we are able to more clearly set out our expectations, understand the impacts of any risks on savers and take action where appropriate.
"For master trusts, supervision is important to firstly make sure schemes continue to meet the authorisation criteria - including that the people involved in the running of the scheme remain fit and proper, systems and processes are sufficient, and the scheme continues to be financially sustainable.
"It will also help us to monitor if other legal obligations are also being met, spot material risks and issues early and take action as appropriate, and enable us to seek to improve the way that workplace pension schemes are run."
Trustees of master trusts will also need to identify and report any significant issues in the scheme - and all schemes will have to send the regulator annual submissions, including the chair's statement, scheme annual report and accounts, scheme funder accounts and a supervisory return, which will ask for updates against the five authorisation criteria.
Brown says the regulator expects master trusts to be open, honest and transparent and proactively volunteer information to the watchdog about any material developments, risks and issues. But she notes the regulator would take a risk-based approach to supervision. Brown says: "How often we interact with authorised master trusts will depend on a range of factors including the size of a scheme, and the particular risks or issues which are present."
Brown also notes the regulator will, where necessary, enforce. She says: "Ultimately, we have the power to de-authorise any scheme which we are no longer satisfied meets the authorisation criteria."
The investment landscape
But it is not only the regulatory environment for master trusts that is evolving - the investment landscape is also changing fast, as the interviews in this supplement show. There are a number of investment trends this supplement identifies - first, as master trust assets under management grow, and increasing numbers of members begin to approach retirement with sizeable pots, there will be increasing innovation in the consolidation and pre-retirement phases.
An increasing number of master trusts are also working hard at increasing the use of ESG factors in their investment process
As Now Pensions director of investment and product development Robert Booth explains: "We will start to focus on alternative objectives at retirement.
"Currently our members tend to have small pots and are taking their funds as cash - as funds grow, I think our glidepath towards retirement will change. At present, our default glides down to 80% cash and keeps 20% in our diversified growth fund, which is exactly in line with what members are doing at the moment. We are starting to look at creating a glidepath that can suit all members."
The People's Pension chief investment officer Nico Aspinall agrees. He says: "At the moment, we hardly have any members who have a pot of more than about £10,000 with us but, over time, we expect more members to stay with us and to start to take advantage of a post-retirement solution with us. "At the top level, we'll be looking at how we invest through retirement and begin to offer multiple routes through retirement."
NEST Corporation director of investment development and delivery Paul Todd agrees: "We will see a lot more development in our strategies for members approaching retirement and those in the retirement phase. There will be a lot more innovation for these members."
An increasing number of master trusts are also working hard at increasing the use of ESG factors in their investment process but asset diversification is also important with a number of the largest master trusts looking at alternatives.
NEST already has some alternatives in its portfolio - currently having allocations to asset classes such as high-yield and property. Todd explains: "As our membership tends to be younger than the working age population in general, we can be a lot more patient in our capital allocation and take much more advantage of the illiquidity premium."
Other schemes are also looking to develop a capability in the area. Smart Pension trustee chairman Andy Cheseldine explains: "Smart is actively developing its capabilities in alternative and illiquid investments that will begin to feature in our proposition in 2019."
The People's Pension is also doing a huge amount of work on its investment strategy- and expects to, among other things, incorporate much more illiquid assets into its portfolio over the coming five to ten years. As Aspinall explains: "Over the longer term, I can see us getting into the place where we could be making unlisted-type investments, looking at some of the patient capital opportunities such as direct property, infrastructure and unlisted debt.
"That's definitely in our future and, over time, I can see that adding to the performance and risk characteristics of the fund."
But while there will be innovations in their default offerings, some master trusts also fear there could be challenges ahead. Mercer solutions leader for DC & individual wealth Philip Parkinson explains: "There are plenty of challenges when we think about the markets and where they are. We believe we're in the late cycle - meaning there is the risk of inflation and rising interest rates.
"Having the ability to rotate the portfolio and move members into, for example, fixed income instruments that are less interest rate sensitive, will become increasingly important with that sort of backdrop."
He adds: "It strengthens the need to be diversified and make sure we are eking out returns and getting the most bang for our buck from every investment we make."
You can download Professional Pensions' guide to Master Trusts, in association with Alliance Bernstein and Hymans Roberston, here.