DC pension market competition: is the Master Trust the answer?
How can we drive quality and competition in the DC pension market?
The UK Defined Contribution (DC) market has evolved significantly over the past decade: around 43% of all UK employees paid into a DC pension in 2017 compared with 17% in 2012, leading to a much greater emphasis being placed on the need for a quality DC pension scheme.
In recent years, there has been a steady and consistent shift away from unbundled trust-based DC structures to bundled arrangements.
DC schemes emerged initially in the form of unbundled (i.e. administration of the scheme and investment management services provided by different parties) trust-based arrangements, set up by individual employers in response to the increasing costs and volatility associated with their Defined Benefit (DB) counterparts.
In recent years, increasing costs, administration, governance requirements and the desire to offer new flexibilities and options available to members, has led to a steady and consistent shift away from these unbundled trust-based DC structures to bundled arrangements (i.e. administration of the scheme and investment management services provided by single provider), namely contract-based schemes and, more recently, master trusts.
Emergence of the master trust
Membership of master trusts has increased from 270,000 at the start of 2012 to almost 10 million in 2017. Almost all (98%) of employers who enrolled during 2015/16 used master trusts to meet their auto-enrolment obligations.
Master trusts provide a useful middle option for those who like the paternalism of a trust-based structure, but want less corporate risk compared to a trust-based DB structure.
Like most things, no one size fits all.
There are three main reasons why a master trust might be a solid option for employers and their employees:
- Outsourced legal oversight to an independent, professional board of trustees.
- Improved offering including access to the full range of at-retirement pension freedoms from within the scheme.
- Master trust trustees continually considering the needs of its members and the latest thinking on investment strategies and member engagement.
Like most things, no one size fits all. Employers wishing to retain complete control may prefer to operate their own trust-based arrangement, while those wanting a hands-off approach, may prefer a group personal pension structure.
Impact of new regulations – small players exit market
The increase in popularity of master trusts doesn’t mean they are without issue. To date there has been very few barriers to entry which led to an influx of smaller providers and concerns over the future stability of the market.
From 1 October 2018, master trusts will need to meet strict authorisation criteria in order to continue operating. These include an assessment under 5 key areas, including, financial sustainability and continuity strategies.
The strict capital requirements of the new authorisation process have already led to movements among providers.
The People’s Pension took over Your Workplace Pension in April this year, and Salvus’ recently announced the acquisition of Complete. It is expected that this trend will continue as smaller master trusts contemplate their future under the new regulations and look to exit the market.
How to choose a provider
The master trust market contains a number of different models:
- ‘Off-the-shelf’ schemes designed for the mass market.
- Traditional insurance companies offering models with bells and whistles, such as access to the latest member tools and wider savings solutions.
- Advisor-led master trusts, the most recent addition.
With the latter we are seeing advisory firms of varying sizes entering the provider space, with a spectrum of different structures.
It is important that employers put in place a quality arrangement that fits their specific membership and objectives for the long-term.
Different providers vary significantly across their entire offering including member charges, investment offerings and access to at-retirement flexibilities and wider savings.
It is important that employers assess these against their key objectives in order to put in place a quality arrangement that fits their specific membership and objectives for the long-term.
Choosing the right provider is key, and while competition in the market is to be welcomed, the need for thorough due diligence and independent review is now more important than ever before.