Master trusts: The consolidation game


24 Sep 2018

New authorisation rules are driving consolidation among master trusts,  but what effect will this have on the  DC market? Mona Dohle investigates.


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New authorisation rules are driving consolidation among master trusts,  but what effect will this have on the  DC market? Mona Dohle investigates.

New authorisation rules are driving consolidation among master trusts,  but what effect will this have on the  DC market? 

Automatic enrolment has fundamentally transformed the UK pension’s landscape and master trusts have been at the forefront of this revolution. Previously known as multi-employer workplace schemes that were organised by industry, the number of master trusts has skyrocketed over the past few years.

Indeed, the market now covers £16bn in assets and membership smashed through the 10 million mark in 2018, up from 270,000 savers in 2012, according to The Pensions Regulator (TPR). The effect of automatic enrolment has been that defined contribution (DC) schemes and master trusts, in particular, are now at the centre of pension saving in the UK, explains Anthony Raymond, acting executive director for regulatory policy, analysis and advice at TPR.

By 2024, master trusts could account for 41% of DC members and 15% of the industry’s assets, researcher Spence Johnson predicts. But with great power comes great responsibility. There are now more than 90 master trusts in the UK, which so far have faced limited levels of regulation. But with the number of players in this market growing along with the size of the portfolios they are managing, the industry has caught the eye of the regulator. From October 2018, master trusts face a six month deadline to apply for regulatory approval, a process which is widely expected to lead to significant consolidation. As of July this year, three schemes have already been wound up.

Another 18 have triggered their exit from the market over the coming months, with more schemes expected to follow, TPR says. Kim Brown, TPR’s head of master trusts, predicts that the authorisation procedure for master trusts represents the biggest change to pension regulation since the introduction of automatic enrolment in 2012.


A key reason for introducing the authorisation procedure were growing concerns that increasing commercialisation of master trust providers could affect the level of services offered. Helen Ball, partner at law firm Sackers, explains: “The issue for the government is that if you are going to put people into automatic enrolment you need to make sure that it’s a good pension scheme. “These vehicles are occupational trustbased schemes but they almost act like a sort of contract for an insurance provider,” she adds.

“So they don’t look like a normal occupational pension scheme because some of them are commercial and they are operating to make a profit.” Unlike other financial services providers, master trusts have had little in the way of regulation to comply with. Ball says: “Compared to, for example, insurance companies, which are regulated by the Financial Conduct Authority, the only real requirement master trusts have faced in the past is whether they had tax approval, which was fairly easy to get.”

But this is changing. “When you combine that with pension scamming, which has been going on, you can see why the government would say: ‘Hang on a minute, we need to make sure that these schemes, of which we now have a lot, are being regulated properly’,” she adds. A sign of the growing regulatory attention that such vehicles are facing have been the fines issued for failing to comply with reporting requirements. Examples include the Nurture Master Trust and Save and Prosper Funds being fined for failing to prepare a chair’s statement.

Then there is Smart Pensions, which did not disclose a £900,000 shortfall in the contributions it received and was subsequently hit with a £15,000 penalty. Nevertheless, a lack of regulation remains a concern in a low-margin business. Consequently, some master trusts are currently operating with low levels of cash reserves and without being covered by the Financial Services Compensation Scheme, a risk that the regulator aims to tackle.

As money purchase schemes, master trusts are not facing the concerns about deficits that are prevalent in the defined benefit (DB) sector, yet cash reserves remain an issue, says Ball. “The issue that the regulator is concerned about is if something was to go wrong with the administration of the scheme or the trustees you would need money to put it right. The question is, where would that money come from? “You can’t take it from the members; you can’t increase member charges because they are already paying an administration fee to cover these costs. So what you are going to have to do is have a business plan and a continuity plan in the event of things going wrong to cover the costs of a potential wind down, so there would have to be some money set aside. “It is not a covenant assessment, but it feels that we’re going more into covenant territory,” she adds. “Although these are DC schemes, we can’t just say you have got to carry on if you haven’t got enough money to carry on.”


In a bid to provide a common standard for master trust services, TPR has outlined five requirements. Master trust trustees will have to first demonstrate that they are fit and proper in terms of knowledge and integrity for their role. Second, they will have to show that the right systems, from IT to governance, are in place. Third, they will have to present a continuity strategy, which accounts for various scenarios covering a range of threats to the scheme. Fourth, the regulator is expecting further transparency on the scheme’s funders, i.e. the companies offering workplace pensions. Last but not least, master trusts will have to demonstrate financial sustainability by showing that they have the resources not just to cover running costs but also the potential winding-up of a scheme. The final point is a particularly crucial one, as it touches on a key challenge the authorities are facing.

While the regulator is keen to restrict the number of master trusts and introduce higher barriers to entry, in a bid to ensure the quality of providers, there remains a need for schemes to take on new members which provide relatively low average contribution levels. The cash requirements the regulator proposed as part of its financial sustainability criteria were set at £75 per member. This would be particularly challenging for schemes which take on a large number of new members with lower contribution levels. Nest, for example, had 6.4 million members (64% of the market) in July 2018. This would imply a cash requirement of £480m, while The People’s Pension, which has around 4 million members, would need up to £300m.

In acknowledgement of this challenge, the regulator is giving master trusts an additional more detailed option of calculating cash requirements, which factors economies of scale into cash requirements. Nevertheless, master trusts still have to hold at least £150,000 in reserve, at least 25% of their projected running costs and no less than 15% of their calculated financial reserves. In addition to these, existing and new master trusts are now facing a fee to register with the regulator, which covers the cost of the registration process. New master trusts will have to cough up £23,000 and existing master trusts will have to pay £41,000. This is another factor that could accelerate market consolidation.


With a shrinking market of providers pointing to an expected increase in mergers between schemes, the question is which elements of the UK institutional market stand to benefit from the transformation? Steve Charlton, SEI’s managing director of DC for EMEA, predicts that only around 30 master trusts will emerge at the end of the authorisation process. While he welcomes the increase in transparency and protection for scheme members, he is also cautions that it could affect the level of choice available to employers looking for a workplace pension scheme. “Rather than just focussing on the number of master trusts that are left in the market, we should factor in master trusts that will appeal to all parts of the market, including those with a smaller number of employers and relatively higher average contribution levels, which is where we sit,” Charlton says.

A beneficial aspect of consolidation are potential economies of scale, which could help master trusts free up resources to invest in potentially more illiquid or a capital intensive assets such as real estate, which in turn could improve investment returns for members. Nest is one scheme which has already indicated that it is looking to expand its share of active and illiquid investments as the asset size of the fund increases. But whether consolidation offers significant opportunities for active asset managers remains to be seen.

So far, master trusts are predominantly invested through passive vehicles, research by the Defined Contribution Investment Forum (DCIF) reveals. Of the 17 main master trusts in the UK, 11 schemes are exclusively invested in passives. Only three of the 17 schemes had active equity in their default strategy and a mere four schemes were invested in active alternatives. The DCIF report reads: “Most of the industry has been trying to offer the lowest possible ongoing cost to employers and while this is laudable, it has squeezed the higher quality assets accessed by other institutional investors out of the picture. “Members of master trusts appear significantly more exposed to market volatility than might be the case either with a higher charge cap or with sponsors more open to including actively-managed and smart beta opportunities.”

Consolidation could also be good news for consultant and insurance-led master trusts, which are competing to take a larger piece of the pie. One report predicts consultant-led master trusts could hold one fifth of all assets in the master trust market by 2026.

Yet Graham Peacock, managing director at Salvus Master Trust, argues that independent master trusts remain a vital cornerstone of the auto enrolment process. “Now that the auto-enrolment process has picked up, insurance companies are sweeping in, but without master trusts the whole process would have failed completely. “While insurance companies were the ones that provided most workplace pensions in the past, they were reluctant to become involved in auto enrolment, most of the heavy lifting was done by companies such as Salvus, Nest and The People’s Pension,” he adds. “Auto enrolment has been a success because independent master trusts have put in a lot of hard work.”

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