With the master trust sector in the midst of a period of intense upheaval, focus is turning to the number of providers the market can sustain, where a competitive edge can be gained, whether master trusts can take on retail investment products and how the role of the corporate adviser will evolve.
Debating these issues at a recent roundtable event, representatives from major master trust providers and technology specialists predicted consolidation still has a long way to go, and agreed the UK had much to learn from the experiences of the Australian super sector.
The Pensions Regulator confirmed that just 38 existing master trusts had applied for authorisation by the time the extended deadline closed, less than half the number in existence just six months ago. Delegates at the debate predicted the number finally gaining full authorisation to be smaller still.
David Bird, director of LifeSight at Willis Towers Watson said he expected there to be around 25 to 30 master trusts left in the market at the end of the authorisation process. He also predicted further consolidation as the new supervisory regime beds in. “Five years from now I’d expect there to be around half that number operating in the market.
Less than 20 master trusts?
Bird pointed out there is little room to add value in the master trust space for schemes that are not able to gain critical mass. “To run a good master trust you will need significant scale,” he said. “And it is this that will drive future merger and acquisition activity.”
Cardano and Now: Pensions head of DC Ralph Frank said: “It will be interesting to see where the dust settles six months from now. We’ve had people knocking at the door who don’t appear on lists of providers known to be exiting this market. Three to five years down the line I’d expect there to be around 10 to 20 ongoing participants in the market.”
But he pointed out that providers will still go through the authorisation process, even if they are looking to exit this market. “If they don’t apply, their value goes to zero straight away,” he added.
The People’s Pension director Gregg McClymont pointed out that this consolidation was one of the intended outcomes of authorisation. “From a regulator’s point of view it is harder to regulate a lot of providers,” he said. “There are questions to be asked though, as to the optimum number of providers in a healthy market, to ensure both higher regulatory standards and sufficient competition.
“In Australia consolidation happened very rapidly. This consolidation process wasn’t just driven by tougher regulatory standards, but by fiduciary tests required of trustees to ensure schemes are providing value for money for members.”
Lessons from Australia
In both Australia and The Netherlands the workplace pensions market is dominated by a handful of large trust-based schemes. “Although the number of providers is considerably smaller than in the UK, the prevailing view, from regulators and commentators in these two countries is
that neither market is consolidated enough,” said McClymont.
This could indicate that consolidation may be far more radical in future. However, he pointed out that the UK market is, by comparison, “very fragmented”.
McClymont also highlighted what he described as ‘serious questions’ to be asked about what the optimal design for a master trust might look like in future, in terms of both not-for-profit, or ‘profit-for- member’ as they are sometimes described, versus shareholder-owned providers; and also the split between retail and institutional providers. “There is a discussion to be had about how these different providers are best placed to deliver value for members,” he said.
The considerably more mature Australian market, which has large master trusts with broad investment propositions, has recently seen outflows from retail Sipp-equivalent funds, with investors transferring their money into industry super funds.
Bravura Solutions business development manager Natanje Holt pointed out that this trend of competing with retail funds is a way for larger master trusts to achieve growth, and attract new money. “There has been a real push in Australia in terms of trusts demonstrating investment performance. We’ve seen significant switches into those that can achieve this.”
She added that providers that had not invested in and updated their technology have lost out. “We’ve seen members switching, where trusts have failed to live up to members’ expectations, particularly in terms of how they interact with their finances.”
Mercer solutions leader for DC and individual wealth, Philip Parkinson said authorisation has proved successful, to date, in “raising standards and creating a level playing field across the master trust sector.”
He suggested that this will also stimulate consolidation in other parts of the DC workplace market, most notably with stand-alone single employer trusts. “I’d expect to see more rapid consolidation in this market,” he says.
Parkinson said larger master trust providers – like those represented at the round table – were not the target of the initial stage of this authorisation process. But he added that over time there may be a more positive side to this M&A
activity, with larger providers looking to grow via acquisition in order to deliver better value for members — rather than the process being driven by smaller providers looking for an exit.
While the authorisation process may not have been designed to “shake out” the larger providers, those attending this event agreed that it had been a rigorous and robust process, that has presented challenges to providers of all sizes.
Rigorous authorisation process
LGIM head of DC solutions Emma Douglas said the regulator was applying “the letter of the law”, particularly on the issue of financial reserves.
This has been further complicated by the fact that TPR guidance has changed over the course of the process, she added. Companies like LGIM already have substantial evidenced reserves as a result of Solvency II regulations, running into billions of pounds.
But all master trusts now need to have their own ring-fenced reserves, even though these would not be necessarily be called up on until the parent company’s reserves were exhausted.
LGIM has recent received authorisation for the two versions of its WorkSave Mastertrust. Douglas added: “It is not a quantum concern about having these financial reserves, it is to do with how they are structured and evidenced.”
Standard Life head of proposition Jenny Holt agreed authorisation has been a testing process for providers. “In our case the master trust proposition is part of our wider workplace savings book. The documentation we had was generally at this wider book level, rather than specific to the master trust, so part of the challenge has been to document and evidence this appropriately.”
LifeSight was the first master trust to receive authorisation under this new regime. Bird said this was largely due to the way the trust had been set up. “The oversight of trustees is clear to follow and audit in a simple way, whether they are commissioning services from Willis Towers Watson or other providers. My reflection, on talking to others in the market, is not all have this clarity from the outset.”
For master trusts to compete successfully post-authorisation – and deliver value for members – scale remains critical, agreed those attending the debate.
Bird said: “It isn’t the regulator putting the squeeze on trusts with smaller members
– we are doing it ourselves. If you are in the AE market already and don’t have this critical mass, you have to ask where this growth will come from. New employers are unlikely to be enough. Will it come from taking over smaller master trusts or single trusts?”
In a sector where charges are capped, having critical mass can help master trusts deliver on investment performance by accessing a wider range of asset classes, as well as giving them the scale to invest in a range of technology options to help drive engagement levels.
Spending on asset management
Douglas said: “In many ways the charge cap might seem like a red herring. Few of the largest master trusts are charging this. But this remains an extremely price sensitive market.”
Recent policy and regulatory initiatives have proposed that DC-based pensions invest in a wider asset mix, to include venture capital and private equity, infrastructure and hedge funds.
Douglas said that given price caps, most master trusts have around 10 to 15 basis points with which to invest in these more expensive asset classes. Those that don’t won’t have the scope to diversify, which may affect longer term returns.
McClymont said that this issue is not just a question of scale, but of structure. Not-for-profit providers – such as The People’s Pension, and Nest – may be in a better position to reduce any margin made on AMCs in order to access these more expensive asset classes, he argued, as they will be focusing on best outcomes for members rather than returning profits to shareholders.
The changing shape of workplace pensions — which looks set to be dominated by a relatively small number of mega-sized master trusts — will, in time, create a new environment for the intermediary sector too.
Bird said: “I don’t think it will be terribly viable for intermediaries to sit down with an employer every three years, review their workplace pension and re-broke where necessary. This is expensive and not very productive. I don’t see employers wanting to revisit these options within this kind of time frame.”
So could this lead to a less than competitive market, where there is little pressure on trusts, in terms of either costs or performance? Providers on the panel thought that this was unlikely.
Bird added: “Poorly performing master trusts are likely to get picked off by other providers.” Although he says that this process is likely to happen through some intermediation.
Parkinson said: “If trustees are doing their job properly, and fulfilling their legal obligations then they should be looking after members and holding providers and asset managers to account.”