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Author: Fiona Matthews

Master trusts – getting it right

Fiona Matthews reviews the benefits of master trusts for occupational pension schemes, how to choose one and the pitfalls of smaller, unsustainable providers damaging market reputation.

The introduction of auto enrolment in 2012, making it a necessity for employers to enrol workers into workplace pension schemes, together with the shift away from defined benefit pensions, have contributed to making the UK defined contribution (DC) market the largest in the EU. As a result of this shift, the Pensions Policy Institute predicts that by 2030 there will be £554bn of DC assets under management in the UK.

The range of governance structures available for DC pension provision includes contract based, such as stakeholder or personal pensions, and trust-based occupational schemes which can be individual trusts or more recently master trusts. Master trusts are multi-employer occupational schemes, usually for DC benefits, where an independent Trustee board makes decisions in the best interests of all its members and oversees the service providers. Over 70 master trusts are now available for UK employers to choose from, many having launched since the introduction of auto-enrolment.

Master trusts have risen in popularity as they are able to help meet a variety of needs in addition to auto-enrolment compliance. These include the ability to accept DC assets from a single trust that the employer no longer wishes to support, allowing them to wind up that trust and avoid the need for ongoing oversight.  Another benefit of master trusts is their ability to act as an ‘at retirement’ partner to receive funds at retirement, to facilitate the employer offering the more administratively complex options, where the fund remains invested in retirement and the member draws benefits at regular or irregular intervals, under what is termed ‘flexible drawdown’ and ‘uncrystallised funds pension lump sums’.

Concerns about the safeguards master trusts offer to members have been expressed by various industry voices. For example, Andrew Warwick Thompson, executive director for regulatory policy at the Pensions Regulator (tPR) is reported to have said that some of the small pension providers “may not be run by competent people”. Such comments have the potential to scare people and prevent them having confidence to save in pensions, as well as lead many employers into questioning just how safe are defined contribution master trusts?

Below I outline what makes a good master trust based on the criteria of effective regulation, protection of members’ assets and governance, and then speculate on the future development of the master trust market.


Contract-based DC schemes are regulated by the Financial Conduct Authority (FCA), whereas trust based arrangements, of which master trusts are a subset, fall under the supervision of tPR.

Mandating all master trusts to obtain the Master Trust Assurance Framework (MAF) accreditation, developed by tPR and the Institute of Chartered Accountants in England & Wales, could go some way to improving governance standards. While such industry-recognised accreditations do require major investment, they would underscore that the pensions industry is reputable and trustworthy, as well as promoting best practice on charges, governance and communications.  The Pensions Quality Mark Ready accreditation, facilitated by the Pensions and Lifetime Savings Association, demonstrates delivery of high standards of member engagement and communications.

Chief executive of tPR, Lesley Titcomb, has talked about her desire for a solvency requirement for master trusts, and for the MAF accreditation to include the requirement to have a discontinuance plan in case of a trust failing. If the master trust provider is a well-established, profitable enterprise, with diverse lines of business, geographies and clients, it is unlikely to hang a failed master trust out to dry. Its reputation would be damaged if it did not put the master trust to bed in a way that kept members’ savings safe. Nonetheless, ensuring the right regulation is there to support the industry will secure the success of reputable master trusts and help garner interest of employers who are looking for a safe option.

Protecting members’ assets

Most master trusts in the UK invest members’ assets through an insurance policy, where the assets are held by a custodian. This segregation of the assets from the investment manager helps protect members in the event that the manager were to fail. Furthermore, arrangements held under an insurance policy fall under FCA regulation and are covered by the Financial Services Compensation Scheme (FSCS).

There will be some variation between master trusts, and employers looking to select one should uncover what protections are in place for members’ assets should the investment manager or the investment platform fail. This will ensure employers are able to identify schemes that are well regulated and have their members’ best interest in mind. However, provided the master trust takes its responsibilities to members seriously, we don’t expect there to be much difference in this respect between tPR-only regulated master trusts and master trusts from insurers that are also regulated by the FCA.


Across the pension industry there is a clear need to help pension managers and trustees to navigate the increasing complexity in pension governance. Whether all schemes will be able to do so remains to be seen, especially since there are so many other obligations and requirements to be addressed in an environment with limited resources.

The scale and expertise offered by a high quality master trust provider means they may be better equipped to tackle the challenges of improving member outcomes, communicating complex issues, looking after the ongoing compliance requirements, and helping members better understand the choices that they are making. They may also offer better value for money for the member than many own-trust arrangements.

From an employer’s perspective, it is important to know the makeup and structure of any trustee board arrangements from a practical viewpoint. Evaluating the trustees’ experience and professional credentials, and asking questions such as how often they meet, what policies they have in place and how they make decisions all give useful insights into the structure and quality of a board and whether the trust is performing well or not. Understanding these arrangements will better help employers identify which master trust will suit their employees.

What does the future hold?

When selecting a master trust, employers need to exercise caution as with any major financial decision. They should be able to outsource their pension provision with confidence, providing they undertake a robust due diligence process. 

Consolidation in the UK master trust market, which has been much anticipated, will likely solve many of the concerns around the security of member assets for smaller enterprises. The recent Queen’s speech has made it clear that legislative changes are coming that will impact a potential new provider’s entry to the market and the powers of tPR, with further details to follow.  In the interim, here are my suggestions on the measures the industry should take to ensure that master trusts remain a reliable way of saving money for retirement:

  • Have a process established by tPR to approve the setup of new schemes, and require compulsory MAF accreditation within 12 months, and before new business can be taken on;
  • The FCA and tPR to quietly direct market consolidation for non-compliant or sub-scale master trusts;
  • Master trusts that don’t have a government-backed guarantee or FSCS protection to obtain insurance in order to demonstrate credibility.

Master trusts can play an important role in improving outcomes for DC members. By bringing scale to bear on the costs members face and in the member communication and engagement tools, allied to professional governance standards, master trusts are likely to be able to provide better solutions than all but the most committed single employer trust arrangements. This could be undone if the reputation of master trusts is diminished by market failures of more marginal providers and a lack of appropriate oversight.