The war for master trusts is heating up – and functionality looks set to be a key differentiator, finds John Lappin
Purpose-built for small and micro employers for auto-enrolment, and able to offer small, standalone, trust-based schemes a cheaper governance option, there are plenty of reasons why the outlook seems positive for big commercial master trusts in the next few years. With the governance obligations on trustees and sponsoring employers increasing every year, consolidation of the tens of thousands of trust-based schemes seems both desirable and inevitable.
But while single employer trusts may look increasingly to alternative arrangements, that may not always mean embracing master trusts. Contract based pensions, particularly with new and higher standards of governance, remain a significant option.
PTL managing director Richard Butcher points out that there has been a significant reduction in the number of single employer trusts over the past few years, down from the high water mark of 45,000. “At the last count it was down to 35,000, but much of that reduction has been in the micro employer schemes. There are about 2,000 single employer trusts with more than 1,000 lives, which is not a huge population,” he says.
“Many trusts are tied to closed DB schemes, and as those DB schemes reach their conclusion there is little logic in retaining a standalone DC scheme. There is going to be movement from single employer trusts across to master trusts or contract-based arrangements. The number of DC schemes will reduce significantly.
But for Butcher, a switch to master trust is not inevitable.
“Arguably the introduction of independent governance committees -levels the playing field, so it becomes almost academic whether you go contract or trust. But while many employers like the concept of trusts, they don’t like doing it themselves, so that may be to the benefit of master trusts.”
Fiona Matthews, managing director of LifeSight, Towers Watson’s UK master trust, says: “With the increased burden of governance falling on pension trustees and sponsoring companies, a lot of schemes of all sizes are saying, ‘Hang on, why am I running a pension scheme in-house – particularly a DC scheme?’ They may struggle to get the right trustees or the right budget for member engagement. There is a cost for investment choices, particularly where people are not just taking an annuity any more. That requires very different investment strategies from those set up traditionally. With the communications and member engagement becoming more important, the increasing burden of governance and nearly every private employee having a DC arrangement, employers are thinking about whether the trust structures they have are efficient, provide value for money and can give them what they need.
“The new flexibilities have been the final straw that has caused employers to think about this because it is going to cost them money if they offer them through a single employer trust.”
Spence & Partners’ lead defined contribution consultant, Mike Spink, says: “We expect a small number of the most popular master trusts to win the lion’s share of new business to incorporate drawdown in-scheme at some point. For the moment, just as with our own trust DC schemes, most master trust providers will be maintaining a watching brief on actual member behaviours post-Freedom Day.
“Given the small average size of DC pot for retirees who have only been auto-enrolled for a maximum of 2.5 years, the providers will rightly expect cash-out to be the predominant option for several years to come.
“The Pensions Regulator expects consolidation to happen and we can be sure that all master trust trustee boards will merit special attention from TPR, with a focus on the degree to which the 32 Quality Features in the DC code of practice have been achieved.”
Only three master trusts have gone the extra mile and achieved accreditation under the ICAEW Assurance Framework: The People’s Pension; Now: Pensions; and SEI.
“Given the significant costs involved in achieving accreditation, it remains to be seen whether TPR looks to make this accreditation mandatory,” says Spink.
He predicts that most employee benefit consultants will maintain master trust panels, which he says will enable them to offer their employer clients master trust procurement services.
“These services will continue to be sought after by all but the very smallest employers, which we expect to bypass advice and go direct to a provider.
But EBCs will usually see future income streams reducing when their client moves to a master trust world. Intermediaries will therefore focus more on added value services in the areas of contribution adequacy, modelling, member support and financial education. Triennial review of the master trust provider will be an obvious service to offer.
“Those advisers who aren’t proactive in alerting their employer clients to the potential efficiencies of moving to a master trust will be playing a dangerous game that could see existing income lost altogether if a competitor raises the idea of a DC options review first,” says Spink.
Aries Insight director Ian Neale believes Nest has also had an influence.
He says: “Because Nest is offering flexible access, master trusts that seek to compete with it are bound to follow. The market opportunity represented by automatic enrolment has spawned a still-growing number of MTs seeking to capitalise, but the pressure of new business strain will cause a number to close to new business and seek a merger. It is almost inevitable that the number of MTs still open to new members post-2017 will be reduced and will continue to reduce as providers fail to achieve the desired economies of scale”.
“The extent to which master trusts will be willing to accept transfers in on behalf of members seeking flexible access is another matter, though as I understand it, in most cases they will only be able to accept a bulk transfer on behalf of a new participating employer. Whether this kind of ‘preferred provider’ model will be viable seems rather doubtful to me at the moment.”
Butcher says: “Pension freedom is a driver of innovation and a driver of commercial master trusts as opposed to not-for-profit master trusts. The likes of Peoples Pension and Now haven’t got the architecture to provide for drawdown. Of course, they can build it, but there is an enterprise risk associated with that. But the commercial providers – such as L&G and Standard Life – have the architecture there already as they have provided drawdown through their personal pension for many years. They either transfer that architecture over to their master trust or they leave it where it is. Freedom and choice may not drive people towards master trusts, but it does drive them towards the commercial master trusts.”
Standard Life head of pensions strategy Jamie Jenkins says a range of factors are driving trusts to consider their arrangements amid huge strains on lay trustees.
“With the freedoms, in the main, we are seeing quite simplified versions of the options offered through master trusts. We think people are moving into a new insurance product if they are going into drawdown from the trust.
“A lot of the big master trusts will offer the annuity because they always did. They will offer the cashout option because, although it is new, it is arguably a variation on trivial commutation.
“Very few of them will offer a partial cash out or seldom drawdown. For those middle options, most members will find they need to move to an insurance based product.”
People’s Pension head of policy Darren Philp says: “This stuff has only just come live, so the industry focus has been on making it work. It was always the case that single employer trust based schemes would wait to see what was on offer. It is a permissive regime. Schemes don’t have to do this stuff, but they can.
“At heart trustees, they will want to make sure that people are accessing the freedoms in areas where there are similar levels of governance. They won’t want to leave their members with nowhere to go.”
Philp says that given the profile of its members, the focus has been on small pot access and allowing people to make some claims on the pot but not take all their money at once. He says the budget changes mean trustees will take a step back, looking at investment and the member journey.
But other commercial providers are moving more swiftly. Legal & General head of governance for workplace pensions Paul McBride says: “We have detected a huge amount of interest in occupational trust schemes looking to transfer their members into a master trust to take advantage of decumulation options. From an L&G perspective and from a scheme perspective, we were very keen to develop scheme solutions for our members to take advantage of flexibilities, both UPFLS and drawdown.”
He says the firm is seeing interest from customers of its investment management group, with some very large schemes asking for assistance. It is also seeing interest from several EBCs. He adds: “A pension scheme is an HR policy at the end of the day and a good HR policy would allow members flexibility.”
He says the rules on transferring are also relatively simple but employers and trustees have to be comfortable that the solution works for them and their members.
“For DC to DC we see our solutions are pretty helpful to members because a lot of schemes aren’t going to offer this facility, especially in the unbundled world because there are such a lot of costs,” he says.
They do have one criterion, however, in terms of commercial viability.
“In terms of the transfer proposition, we are working with clients to make sure we are not simply paying out all the money as soon as it lands with us. We are quite happy to pay out UPFLS over time but we don’t want to be the company that pays out in one event. We would lose money doing that. That is about the only control mechanism we want to put in place,” he says.
In terms of transferring, the process is relatively simple.
“Once a member is in our scheme, they give us an instruction, whether drawdown or UFPLUS, that goes to our operations area, and we carry out that instruction. Our service area agreement is that we will carry that out around the fifth day.”
However, the big providers may not get things all their own way. The EB market has also reacted to the change – some by linking with providers – but with Towers Watson setting up its own arrangement offering a master trust and ways to access the pension freedoms, including a drawdown proposition, even to those master trusts that are not with their scheme for accumulation.
The proposition is aimed at sponsors looking for the independent governance and quality of a trust-based scheme with the cost-effectiveness of contract-based pension provision, allowing for larger-scale pooling of assets than traditional single-employer trusts, resulting in economies of scale and increased purchasing power that benefit both employers and members.
Matthews says: “With 95 per cent of our administration clients, they don’t want to increase their risks or their governance burden. They don’t want the cost that goes with introducing the flexibilities into the scheme. If they were to extend this to have drawdown within the schemes, there are administration costs, communication costs and they need to govern it. If members’ money runs out, they run a reputation risk.”
“Many will see that the main product on the market is a Sipp, but will see this as too complicated and confusing with regard to investment choices. There is a gap for something that is trust based, gives value for money for members and isn’t confusing, where a scheme says ‘I can’t recommend where you go, but I can provide you some direction and some choices’.”
She adds: “This is a massively growing market and there is room for new players, though at the same time there is also consolidation with players struggling to survive.”