The Pension Policy Institute research paper on the sustainability of master trusts, made me ask two questions which I do not see addressed in the report. What about the customer? And why bother saving master trusts?
I doubt it is their intention, but the PPI seem to have written an excellent business case for closing standalone master trusts – those where the sole business of the organisation is to provide a trust-based pension scheme.
They call out that the sector is unlikely to break even before 2025 and that a growing number of deferred members are a significant burden given the increased costs of maintaining a dialogue with individuals other than via an employer.
There is of course a simple answer to this – don’t be a single solution provider.
For most of the last decade there has been a trend towards providing a far wider range of services built around a workplace pension core. Wellness solutions, physical, mental and financial are a perfect example, as is providing a wider range of savings vehicles in parallel, rather than restricting the saver to a one size fits all solution. This approach enables pension providers to provide a broader service that is far more valuable to the consumer than just a standalone pension. A wealth of research demonstrates the improved economics of providing multiple services to consumers. This builds greater loyalty and most important of all, more customer value.
In addition to Nest, Now and People’s, the PPI report also refers to Legal & General’s master trust and Smart Pension. I find this a strange grouping. The latter two organisations, who are closely connected by shareholdings, have both made significant investment in technology to deliver far more than just a simple master trust to their customers.
As I reported on these pages some months ago Legal & General, for example, has done excellent work delivering video pension statements and a pension dashboard-ready client portal. Equally, Smart Pension, as the name suggests, makes technology and innovative support services a priority. I fail to see why such innovative businesses should be included in this group.
A service which uses a single vehicle, that is, a pension, to address savings accumulation, with very limited decumulation options seems a very dated model to me. Is this what customers will want by the middle of this decade – the point at which according to the PPI, master trusts might break even. At the very least it is a monochrome solution in a UHDTV world.
Perhaps before Covid-19 a simple master trust model might have had a decade or more left in it. Now for multiple reasons the pandemic may also claim master trusts as a victim.
The tax benefits of pension products look increasingly unsustainable. The new world of a rapidly accelerating digital economy, particularly in financial services, must put their commercial model under growing pressure. This exposes the fundamental weakness of the standalone master trust model, and the inability of these organisations to raise additional funds for product and service development.
Nest already seem to have recognised this challenge. The recent appointment of Gavin Perera Betts to run the Nest Experience business unit looks a very positive step.
I have long believed the Government’s loan to Nest would end up being repaid by a trade sale or IPO. There were many lessons from the demutualisation of pension providers 20 years ago. What valuation would you put on a pension provider with 9 million customers? Perhaps split between a significant injection into members funds, working capital to grow the business and something for the Treasury?
With Chancellor Sunak under huge financial pressure I would not be surprised to see a Nest disposal announced in the first budget after we have left the EU. Imagine what one of the FAANGs could do with an established customer base of that size and their technology capability? The recent acquisition of the Salvus Master Trust by Cushon, formerly Smartley, shows a logical way forward for those master trusts struggling to broaden their offering.
The large master trusts do have a substantial number of customers which is valuable, but they may need new ownership structures to help them raise the capital they need to deliver broader propositions fit for the next decade.