Regulatory and economic pressures will result in further master trust consolidation, which could see even some of the larger traditional providers effectively leaving the market.
This was the stark view of LCP principal Philip Audaer, in a presentation to delegates at Corporate Adviser’s annual summit, held in Windsor this year. Audaer predicted there will be just 10 to 12 master trust providers within the next five to 10 years.
“There still too many providers chasing too few opportunities,” he said. “Traditional providers are heading in the same direction, and will be impacted by the raft of legislation coming this way.”
He outlined the changes ahead which include the extension of the AE framework, value for money legislation, small pots legislation, CDCs and the DWP increasing levies “by a considerable margin”. At the same time he says there have been changes to the lifetime allowance, and a potential change in government which could lead to members looking to ringfence or crystallise benefits. This, he added is before the proposed Mansion House reforms.
This situation may be exacerbated by a number of large schemes that are likely to come to market within the next five years. “Many of those will want things that are currently not on the master trust menu,” Audaer said, adding it will be those of scale who may be best placed to deliver on these demands and win this business.
He says schemes are looking for a range of things, including no asset transaction costs, guaranteed administration charges — which might be fixed for five to 10 years — liability caps, and the ability to replicate current default and self-select fund options. In some cases there is also demand for with-profit AVCs to be assigned within the master trust structure. “All of this will require additional oversight that not all master trusts can do,” he says.
There will also be demand for master trusts to provide more personal rates of return to members. “Clients want increased analytics capability. In terms of data looking at in more detail. This might include microsites and advice tools, particularly for those pre- and post-retirement.”
All of this is likely to result in the need for increased budget on technology while will put further pressure on master trusts at a time when margins are being squeezed.
Responding to comments made earlier in the day — from Capital Cranfield professional trustee Andrew Warwick-Thompson that EBCs had too much of a focus on cost — Audaer said that part of the problem is that trustees of single employer trust, which have benefited from institutional pricing, are reluctant to sign off transfers to master trusts if there is a higher cost. It may be a case that the industry needs to wait until these big schemes are on board before it raises costs and start looking at a more value-driven propositions he said.
LCP’s investment analyst Lizzie Potter said master trusts are also likely to face increased scrutiny of their investment strategies — particularly as significant divergence is emerging in performance across the master trust sector.
This is likely to be further exacerbated by the government proposals to encourage master trusts to invest in private equity and other illiquid assets. Some of the difference is reflects the disparity in resources between different trust providers, and this is likely to result in more of a regulatory lens on investment strategy and whether there is a “trajectory for delivering more sustainable returns”.
However she said she did not expect the UK to follow the Australia’s lead — where the bottom performing schemes have to “candidly communicate with members” advising them to switch. But she added increased scrutiny is likely to further hasten consolidation in this market.
Potter said trusts also need to improve their DE&I records. “Considerable progress” had been made when it comes to gender representation, she said with women now accounting for almost half of those (46 per cent) sitting on master trust trustee boards. There has not been the same advances though when it comes to ethnicity and race with just 2 per cent of master trust trustees from a minority background – compared to 18 per cent in the UK as a whole. Boards are similarly unbalanced when it comes to age – with two thirds now over 55.
The post CA Summit 2023: Significant contraction of master trusts in next five years appeared first on Corporate Adviser.