The past, present and future of DC master trusts
Some of the LifeSight team attended and presented a session on the past, present and future of master trusts at the Association of Consulting Actuaries conference earlier this month. David Bird shares some content from his session as well as looking into the future, reflecting the Pensions Regulator’s call for tighter sustainability controls for master trusts.
Evolution of master trusts
Before 2011, master trusts did not achieve any real market penetration, being perceived as a solution for a small group – for example, when dealing with DC assets for schemes entering the Pension Protection Fund. However, in 2011, DC master trusts came to the fore in response to auto-enrolment, marked by the launch of NEST. Big-name employers started to select master trusts as an auto enrolment solution and traditional life companies then started to enter the market. The master trust profile has been enhanced by support from advisers and employee benefit consultancies, which have subsequently launched products.
Not all master trusts are the same so a closer look is necessary for anyone contemplating using one. Some sources list over 70 master trusts in the UK. This is perhaps a surprisingly large number, given the need for master trusts to be able to achieve a large scale as quickly as possible.
In summary, the current market is diverse and constantly evolving.
Role of master trusts for employers today
Particular reasons to review pension arrangements may come from changes in businesses, for example mergers and acquisitions, divestments or changes in strategic direction, and changes in how employees are rewarded. Reviews may also be triggered in light of Pensions Tax changes, post auto-enrolment reviews and to appraise how to meet increasing DC Governance requirements and associated costs.
Master trusts can help meet a variety of needs, such as auto-enrolment solutions; outsourcing and being the preferred future pensions vehicle for all employees; discharging legacy DC trust-based plans into sound arrangements; and as an “at retirement” partner to offer flexible drawdown and ‘uncrystallised funds pension lump sum’ (UFPLS) solutions for single employer trusts. Our role as consultants is to help ensure that our clients are provided with the ‘best fit’ solution for their specific needs.
Employers are also grappling with governance challenges arising from increasingly mobile employees leaving deferred pots after potentially short service periods. For a single employer trust offering drawdown the Trustees are likely to find they are looking after members for a period far longer than they were in the employ of the company.
We are seeing more employers who want to outsource, but there is an understanding that they can’t, and don’t want to, outsource everything. Employers also want to retain control of the financial costs of the scheme.
With few barriers to entry and concerns around durability, it is no surprise that the Master Trust Assurance Framework (MAF) accreditation was brought in. Master trusts can also seek the Pensions Quality Mark Ready status via the Pensions and Lifetime Savings Association. These accreditations help employers and advisors filter the market to those who are more likely to be durable. LifeSight has achieved these accreditations.
The Regulator has raised concerns around the sustainability of master trusts and flagged that there is no financial requirement on master trusts around solvency. Although as these are DC arrangements there is likely to be less risk to the member as their funds are allocated on an individual level (and not pooled), there is a residual risk. For example, that the sponsor becomes insolvent or unable to meet their obligations leaving the Trustee, who have limited resources, to run the master trust. The MAF requires the Trustee to have a discontinuance plan in place to ensure individuals’ pots are protected and transferred safely, but this may not give the Trustee access to resources to deal with all events. Ultimately the Trustee will retain the ability to use members’ funds to fund any resolution activity – an outcome that no one will find desirable.
In the short to medium term, we expect to see market consolidation as small products/providers exit the market. This may be accelerated by a mandatory requirement for MAF accreditation, which we would endorse.
Within the master trust market, market consolidation can provide economies of scale, but given the array of master trusts on the market and the range of companies looking for solutions, it is likely to remain a competitive market. A balance needs to be found between consolidation, which helps achieve scale, and competition which is critical for innovation and evolution of products and member-focussed solutions.