As tougher regulation forces consolidation, small master trusts will learn the hard way that they are not as commercially attractive as they might think, warns Aviva head of workplace pensions Dominic Fryer
The rise of master trusts is well documented. Since the launch of auto-enrolment (AE) they have proved a good solution for companies who need a workplace pension scheme but don’t want to manage all the governance that goes with it.
And they are proving popular. The Aviva Master Trust has seen its AUM quadruple this year and we are getting a lot more enquiries from large, multinational corporations.
However, one side effect of the ‘light touch’ regulatory environment in which master trusts exist is the fact that we now have a lot of them – 80-plus the last time I counted.
Now, we all know competition is healthy. It can drive up standards and drive down costs. But, to be frank, making money from pensions is hard. Auto-enrolment may have introduced millions of new savers, but their contributions are low and there is a charge cap of 0.75 per cent.
Costs around administration and governance of a pension scheme are also high, and increasing. Regulations setting down the rules for master trust authorisation have just landed, bringing with them a requirement to meet governance standards commensurate with the Master Trust Quality Assurance Standard along with an authorisation fee of up to £67,000.
The big challenge facing master trusts is sustainability. There simply isn’t the market out there for 80+ master trusts to be profitable. Viable schemes need scale. You need lots of employers and lots members paying in every month. Many of the existing master trusts simply don’t have that.
That is why 2018 is likely to be a year of consolidation in the master trust market. The smaller providers are going to realise pretty quickly that they have bitten off more than they can chew. Their costs are outstripping their revenue and reality isn’t matching their business model. Schemes will have to make difficult decisions, or have the Pensions Regulator make decisions for them.
Even if the decision has been made that a master trust is no longer sustainable, the challenges continue. A failing master trust will need to give notice to the employers using them for AE and offer them a transfer to a default alternative scheme, but there is nothing to say that the employers will want to go there.
Employers in failed master trusts are likely to want the comfort of knowing that lightening won’t strike twice, and choose a well-established name. The default provider may find they are left to transition the least engaged employers onto their platform. There is a real risk that absorbing another master trust’s book of business isn’t necessarily going to be an attractive proposition.
I realise that is a pretty stark message, but it is the reality, and a reality that has been public for some time.
Employers and their employees signed up to master trusts looking to comply with AE regulations and to give savers the chance of a better retirement. The solution for wind up within the regulations should mean that members of master trusts that are closing down are not disadvantaged. It should also mean that employers are able to choose the provider that best matches their business need.
If I was going to make a prediction I would say that Nest is well placed to pick up a proportion of this type of business. A scheme backed by the government shouldn’t get into financial trouble. But there is a wrinkle – Nest can only take bulk transfers from employers who are already using Nest for automatic enrolment for at least one employee. Where, for example, there are employees in a failed master trust who previously worked for a now insolvent employer, Nest would not be able to accept the transfer. In cases like this there will be some tidying up to do and it will be up to the industry more generally to offer a solution that protects every member’s benefits.
There will be some books of business that are of commercial interest, but employers in a failed master trust still have a free choice over which provider they would like to move to. This means any receiving scheme has to be able to offer a compelling proposition to the employers. Those companies looking to wind up their master trusts may need to face up to the fact that the real value in their scheme doesn’t lie in the funds under management. The real value is in a) a mailing list of employers who may be willing to move to the default scheme, and b) the potential funds under management generated in the future
30th November 2017 is the date the starting pistol was fired on consolidation activity. I think we will see it continue throughout 2018 and beyond.
And when the consolidation period is over? In my opinion there is enough room for around 10 master trusts. These would be large enough to be profitable, have strong governance procedures in place, have slick and efficient administration and above all else offer value for money for employers and members.
The future is bright for master trusts, but it’s a future with fewer of them.