The revolution in the master trust sector has continued its seemingly relentless progress despite the pandemic.
The big drivers remain political and regulatory pressure to improve standards and offer better value for money in the wake of a tough authorisation process while smaller single-employer trusts continue to face pressure to raise standards or merge into larger trusts.
Consultants say this also sets the scene for increased competition and increasingly in-depth discussions about terms and charges among scheme sponsors, consultants and master trust providers. But who is winning the battle for market share?
Hymans Robertson head of DC provider relations Shabna Islam gives the following neat assessment. “With around £80bn of assets under management held in the master trust market, across the 37 authorised providers, there are 10 key providers who own 90 per cent of this market.
“The largest owners are Nest, the People’s Pension, Legal & General and LifeSight (the Willis Towers Watson master trust), each owning over £10bn of assets. Other distinguished providers aren’t far behind, owning around £2bn to £5bn of assets. With the move towards master trusts and away from single employer trust schemes continuing to grow and an active consolidation market between providers, the battle for market share could change quite significantly over the next 12 to 18 months.
“There are also new entrants of various guises who are looking to disrupt the market offering highly attractive solutions, including banks and global financial institutions that do not currently have a foot-hold seriously looking on whether they wish to participate in this market,” she adds.
Considering where EBC-run master trusts sit in the landscape as providers, Islam adds: “They have something different to offer in comparison to say an insurer-based provider. EBCs offer a tailored service, which is valued by employers looking for a high-quality pension provider for their members. In the past this would have come at a high cost to members but EBCs have recognised this and have become as competitive as insurers over recent times. EBCs are selective about who participates in their master trust, they look for higher than average salaries, low staff turnover and high assets under management.”
Quantum Advisory senior consultant Robin Dargie says: “Our experience is that the more well-known names in the market are gaining the most traction. The smaller, less well-known master trusts don’t seem to be growing as quickly as the larger ones, which is leading to gradual consolidation in the master trust market. “We’ve already seen some mergers and this is expected to continue. Master trusts are all about scale and merging with another master trust is an easy way to achieve that. Several of the master trusts make no secret that they are in acquisition mode.”
Dargie notes that around 10 of the authorised master trusts are restricted to employers in certain industries or with certain religious beliefs. He says these trusts will probably continue in their existing form while others are what might be termed ‘accidental master trusts’, their creation having been forced by legislation.
He adds: “Of the remaining open-to-all master trusts, assets under management for the very largest schemes are well over £10 billion and their growth appears to continue unabated. They have thousands of employers participating with millions of members. Smaller master trusts, on the other hand, are a long way from achieving such scale.”
The Lang Cat director of public affairs Tom McPhail says: “The authorisation process flushed a lot of providers out of the market. The sector is still going through a consolidation phase. There is still a driver for growth in terms of employers with assets growing pretty rapidly. A lot of it is coming from the DC own-trust schemes and the DWP agenda to have fewer better run schemes. Consolidation and growth of the winners will continue apace for a while yet. But one of the interesting drivers will be ESG. Nest is pushing on this, and it will drive activity. A slower burn will be small pots but in addition don’t underestimate disruptive tech, which is causing a lot of head-scratching across the sector.”
Dargie has concerns about a capacity crunch resulting from some of this pressure to merge.
“Facing ever-increasing governance requirements, we have already seen trustees closing their own-trust schemes and transferring members to a master trust. If this trend continues, there are concerns about a capacity crunch, particularly as government pushes for consolidation of such schemes. We might see master trusts becoming more selective in the employers and schemes they are willing to accept in the coming years,” he says.
Helen Ball, a pensions lawyer advising employers and trustees at Sackers, says the transfer process itself can bring significant change.
“We have quite a few DC schemes that have already transferred into a master trust, some that are in the process of doing so and some that are considering doing it. In the last twelve months, the appetite for master trusts as a product has not gone away and indeed has increased. The nature of the product is more sophisticated than it was, but there is a long way to go.
“Every time you get involved in a project, there is an element of ‘bespoking’ whether that is because the investment strategy doesn’t quite match what a transferring employer or transferring scheme is looking for, or because the commercial terms are not quite right.
“Quite often, the providers will agree to fix the annual management charge now, for different lengths of time and it is all to do with how much money you are bringing across. Providers are getting more sophisticated in how they price things.”
She adds that commercial terms are getting more detailed and matters that might not have arisen a few years’ ago are now being discussed and negotiated.
She says this includes considering and agreeing what happens if a scheme decided to exit, and querying the details of offers to pay all fees, which could be capped, something which may not have been mentioned or made clear during the beauty parade.
Yet while many of these matters will be determined by negotiation, regulators are still worrying away at the shape of the market.
Ball notes that at a public meeting in March, TPR gave the impression it was not massively keen on every employer negotiating different investment strategies. “They did not want master trusts to have large variations in investment options because they are not sure the master trustees have the resources to monitor all the different defaults,” she says.
When asked what features are important to employers, Islam sets out a long list. She says: “Typically we see investments, member charges, communications and administration take priority. Employers are looking for high impact member communications, a joined-up investment solution pre and post retirement with strong performance, and high-quality member-focused administration. Retirement support for members is becoming a priority as more DC members are retiring, and it’s naturally expected that strong governance is in place.
“The market is continuing to develop rapidly, so it remains really important that employers don’t simply transition to a master trust and forget about keeping an eye on their provider – ensuring the best from a provider really does come with regular review of services being provided and continuing to nudge the bar and check quality against a fast-changing market. We are starting to see movement of participants from one master trust to another, as a result of these regular reviews.”
Dargie says master trust charging structures can represent a further complication. “In selecting a master trust, employers want one that keeps charges low for their employees. However, the tiered charging structure for some master trusts is a bit more complicated than some employers might be used to. Any one-off employer set-up charges tend to be small enough for employers to
swallow. We’ve already seen revised charging structures and this may continue. As the largest master trusts get bigger – their scale should allow future reductions in charges.”
Dargie says other important features are tax relief – some master trusts offer both relief at source and net pay, ESG credentials including commitments to net zero, investment choice and retirement options. Some master trusts have teamed up with other organisations in order to offer guidance to members. Employers will expect good service levels too, he says.
“Employers will also want to look at a comparison of master trusts’ risk-rated investment fund performance. They should ultimately be looking for the best member outcomes. While value for money can be examined, this is more nebulous, and all master trusts will claim they provide good value.
“There is certainly a view in that sector is grappling not just with costs but with the broader idea of value, once again partly due to the urging of regulators.”
Ball also notes this shift especially given legislation on value for members which comes into force in October.
She says when talking to policy people at the regulator, there is a sense there has been a little too much emphasis on cost and charges and not enough on performance strategy.
“In this talk in March, the regulator hinted they might look at how you compare investment strategies. Charges are important, but you can only reduce charges so much, and if the emphasis changes to what do I get when I put in £100, that may be a good thing.”
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