What is a master trust pension?

Since the auto-enrol­ment rev­o­lu­tion of 2012, mil­lions of work­ers have begun retire­ment sav­ing for the first time, often with a mas­ter trust pen­sion. Indeed, more than 16 mil­lion peo­ple have put £38.5 bil­lion into these schemes.

A mas­ter trust pen­sion is a trust-based scheme that a mul­ti­tude of unas­so­ci­at­ed employ­ers can join, shar­ing resources and reduc­ing costs, in par­tic­u­lar, admin­is­tra­tion, trustee­ship and invest­ment man­age­ment, through bulk pur­chas­ing. They are close­ly super­vised by the Pen­sions Reg­u­la­tor which has autho­rised 38 mas­ter trusts.

They range from the giant Nest, with more than nine mil­lion mem­bers which has a pub­lic ser­vice oblig­a­tion to take all com­ers includ­ing many large retail­ers with tran­sient work­ers, as well as the tra­di­tion­al pen­sion providers such as Legal & Gen­er­al, Aegon and Scot­tish Wid­ows. Employ­ee ben­e­fit con­sul­tan­cies, includ­ing Willis Tow­ers Wat­son, with Life­Sight, and Aon, are also mov­ing into this space.

Pensions Regulator imposing stricter rules

Mas­ter trusts are not yet the dom­i­nant force in work­place pen­sions, but there is irre­versible momen­tum in this direc­tion because “employ­ers are sand­wiched between the need to reduce costs at the same time as the Pen­sions Reg­u­la­tor is expect­ing more from trustees”, explains Roger Bree­den, part­ner and work­place sav­ings propo­si­tion lead at Mer­cer, a pen­sion con­sul­tan­cy.

Analy­sis by Broad­ridge, a finan­cial research com­pa­ny, esti­mates that by 2028 assets under man­age­ment for mas­ter trusts will grow to approx­i­mate­ly £424 bil­lion, although some weak­er and small­er mas­ter trusts may fold along the way.

In the mean­time, there is a land grab among the mas­ter trust pen­sion providers, as they try to reach scale as quick­ly as pos­si­ble. Paul Lean­dro, part­ner at pen­sions con­sul­tan­cy Bar­nett Wadding­ham, says: “Com­pe­ti­tion is fierce, and we are see­ing some very com­pet­i­tive deals put for­ward by providers. Some are even offer­ing to foot the bill in terms of trans­ac­tion costs when mov­ing assets across. We hope these pro­posed charges are not bor­der­ing on the unsus­tain­able.

Com­pe­ti­tion is fierce and we are see­ing some very com­pet­i­tive deals put for­ward by providers

“We do seem to be fol­low­ing the trends seen in Aus­tralia, which uses a pen­sion frame­work cod­i­fied on the UK sys­tem and where mas­ter trusts are by far the dom­i­nant form of pen­sion arrange­ment, and where con­sol­i­da­tion has been fierce. The num­ber of schemes reduced from about 3,000 in 2002 to 230 in 2017. Assets in the Aus­tralian super­an­nu­a­tion sys­tem are around $3 tril­lion. It is not unfea­si­ble to see the UK going in the same direc­tion.”

The advantages of a master trust pension

Accord­ing to data from the Pen­sions Reg­u­la­tor, there were 1,050 defined con­tri­bu­tion (DC) sin­gle-employ­er trusts and only 370 of these had more than 100 mem­bers. Jon Park­er, head of DC and finan­cial well­be­ing at Red­ing­ton, says: “Over the next five years, a large pro­por­tion of these will trans­fer to mas­ter trusts, leav­ing around 150 remain­ing as open employ­er trust-based arrange­ments.”

Wills Tow­ers Wat­son FTSE 350 DC Pen­sion Scheme Sur­vey 2020 shows 39 per cent of FTSE 100 com­pa­nies have con­tract-based pen­sions, 39 per cent have trust-based pen­sions, such as a sin­gle-employ­er trust, and just 22 per cent have mas­ter trusts, while the Aon DC Sur­vey 2020 shows 35 per cent of par­tic­i­pants with their own DC trust were look­ing to move to mas­ter trust pen­sions with­in the next five years.

Tony Pugh, DC solu­tions leader, Europe, Mid­dle East and Africa, at Aon, says: “Per­haps the main advan­tages trig­ger­ing the major­i­ty of move­ment from own trust to mas­ter trust are the sig­nif­i­cant costs and resource sav­ings avail­able to employ­ers that move.”

Emma Dou­glas, head of DC at LGIM, adds: “Many pro­vide addi­tion­al guid­ance and sup­port to help mem­bers with their finan­cial well­be­ing and equip them to make bet­ter-informed deci­sions on con­tri­bu­tion rates, invest­ment options and their income needs in retire­ment.”

High on the list of desir­able options for a mas­ter trust will be low charges, online tools, apps, newslet­ters, a good range of funds, includ­ing envi­ron­men­tal, social and gov­er­nance con­sid­er­a­tions, guid­ance and access to retire­ment options, with all the pen­sion free­doms avail­able such as in-scheme draw­down and uncrys­tallised funds pen­sion lump sums or flex­i­ble with­drawals.

Workplace alternatives to master trusts

Yet assets under man­age­ment in sin­gle-employ­er DC trusts and con­tract-based schemes out­weigh mas­ter trusts by a sig­nif­i­cant amount. “At the end of 2018, there was £33.4 bil­lion in assets under man­age­ment in mas­ter trusts com­pared to £184.5 bil­lion for sin­gle trusts and £170.6 bil­lion in con­tract-based schemes,” notes Dou­glas.

On the flip­side, Kay Ingram, direc­tor of pub­lic pol­i­cy at LEBC, an inde­pen­dent finan­cial advis­er, feels that mas­ter trust prod­ucts may have lim­i­ta­tions, specif­i­cal­ly regard­ing fea­tures, func­tion­al­i­ty and fund options.

Aon’s Pugh fore­casts: “For employ­ers want­i­ng a high­ly tai­lored solu­tion and who have the resources and scale to ensure costs charged to mem­bers are rea­son­able com­pared to the alter­na­tives, their sin­gle-employ­er trust will con­tin­ue into the long term.”

Many small and medi­um-sized employ­ers favour group per­son­al pen­sions (GPPs), which are also evolv­ing at pace with providers. Indeed, Ingram says: “GPPs are prob­a­bly a step ahead with their tech­no­log­i­cal solu­tions, with sophis­ti­cat­ed online access, online pen­sion trans­fer capa­bil­i­ty and inte­gra­tion with per­son­al bank­ing solu­tions and apps such as Hum­ming­bird, which are inde­pen­dent of any one provider.”

Master trust misinformation harming pensioners

The mas­ter trust providers con­tin­ue to focus on asset gath­er­ing, rather than help­ing mem­bers in how to draw mon­ey away from their pen­sion pots and the mar­ket is still catch­ing up with the intro­duc­tion of the pen­sion free­doms intro­duced in 2015. One increas­ing wor­ry is that mem­bers at retire­ment are leav­ing mas­ter trust pen­sions for high­er-charg­ing retail alter­na­tives or because advis­ers are incen­tivised by increased fee rev­enues to rec­om­mend com­plex trans­fers out.

This is caused part­ly by a big dis­con­nect between finan­cial advis­ers and the mas­ter trust mar­ket. Bree­den at Mer­cer says: “In some cas­es, retirees are tak­ing their mon­ey out of insti­tu­tion­al­ly priced mas­ter trusts into more expen­sive per­son­al pen­sions because of a per­ceived lack of flex­i­bil­i­ty in the mas­ter trust or because it doesn’t fit well with the advis­ers’ wealth man­age­ment ser­vice.”

The lead­ing mas­ter trusts do pro­vide some sup­port to mem­bers as they approach retire­ment, but some do not give enough, cost-effec­tive sup­port after a mem­ber retires.  Lean­dro at Bar­nett Wadding­ham stress­es: “Peo­ple using draw­down are still mem­bers of the mas­ter trust and the trustees still retain fidu­cia­ry respon­si­bil­i­ty for these mem­bers’ assets.

“Help­ing peo­ple to and through retire­ment remains a major chal­lenge for the indus­try. At the moment there is a cohort of retirees being left out in the cold, unsup­port­ed at a time when they’re mak­ing extreme­ly impor­tant deci­sions about their pen­sion sav­ings.”

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