The rise of the master trust seems unstoppable. Auto-enrolment has brought 10 million new savers into these giant schemes, while pressure from the Pensions Regulator and employer demand has seen many own-trust schemes moving to master trusts as well.
Scale and resource is not just an issue for single-trust schemes – many smaller master trusts are waiting to see if they can make the grade in terms of authorisation. Yet for the big master trusts the dominant theme remains that they are set for soaring exponential growth.
The sector is predicted to grow to more than £300bn by 2026, and delegates at a Corporate Adviser round table, held in association with Aviva, were united in the belief that master trusts will dominate the large scheme market, although caveated by the view that rumours of the demise of the GPP are premature.
PwC head of defined contribution consulting Philip Smith pointed out that master trusts are not accepting business from across the whole market. “It does depend on the size of the employer and the quality of the scheme. The commercial master trusts have been quite selective about the business they want to take on,” he said.
“It is even the case with what you might consider to be a decent quality scheme, with good contribution rates but a lower paid population. We have just finished an exercise helping an employer in that space with 800 people, average salaries in the higher £20,000s to £30,000s, and a 12 per cent total contribution rate. No interest from the commercial master trust market at all. You are left with the Nests, the Nows and the People’s.
“At the top end, master trusts are dominating, and will continue to do so for a whole variety of reasons, primarily around governance and costs. With GPPs and GSipps, it is a mixed bag. With the drive towards scale and cost reduction, I don’t see that stopping any time soon.”
Hymans Robertson head of DC scheme design and provider evaluation Jesal Mistry said: “One of the key drivers to employers moving away from their own trust is the changes in regulation and
governance requirements in the last five years or so. That is forcing companies to think about not only the costs but the risks that they face with DC arrangements. So they ask how can we share this risk with someone else? Master trusts have become the option, because it is easy to move money there.”
Mistry did suggest that where and when employer pensions get to a billion or several billions in assets they start to think about running their own administration. “At the really large end, we may see unbundling in five to 10 years’ time, but certainly for FTSE 250 firms, the trajectory is more towards master trusts than moving things away.”
Fund choice could still favour GPPs and GSipps
However, some panel members did see GPPs and particularly GSipps retaining their appeal for at least some parts of the market – not least the smaller intermediary sector not reflected in the make-up of the panel.
Willis Towers Watson senior consultant Mark French said: “Master trusts may appear a bit too vanilla for more sophisticated investors. That may keep the appetite for group Sipps alive for longer. Or you might see hybrid arrangements where master trusts might partner with group Sipp providers to cater to both ends of the spectrum.”
He added that resourcing remains an issue for smaller trusts as well.“In terms of development, the traditional provider market has had the resources to be able to put a lot of budget towards pension products, especially with digital developments. Will the master trust side be able to be able to keep up? That could put them ahead of some sections of the master trust market.”
Barnett Waddingham client relationship manager Martin Willis also argued that differences between the two models would see at least GSipps maintain some market share. He said: “As long as there is a distinction between the two frameworks, there will be a market for both. It is about that wider investment choice. Some employers will want to go for something more bespoke. Maybe the GPP in its traditional flavour will disappear but the GSipp bolt-on might stay.”
He also suggested that master trusts would soon face an important stress test – whether they can respond to change quickly.
“There is an idea that with master trusts, you have to get the go-ahead from different parties. That is going to be the first real stress test. You are getting lots of providers merging. It was always meant to be the trustees who decided who was the provider of that master trust.
“Equally what about when people want to transfer out? How easy is that going to be? You have got to get the master trust trustees to sign off as well. So, I don’t think the road ahead is completely clear for master trusts.”
That said, he still believed that master trusts should win out because of the business they will win from those transitioning from an own trust.
Sticky business
Participants suggested that providers had entered the master trust market because it was viewed as “very sticky business”. However, Aviva policy manager, workplace benefits Dale Critchley, did not agree. “If your market is large pension schemes, it is less sticky. My pricing actuaries are less happy about master trusts, because they can take all the assets under management away to another provider on a single signature – rather than having to run a direct offer exercise.”
He also suggested that while EBCs like master trusts, corporate IFAs may be sticking to what they know.
“The advisers for the larger employers are tending to move towards master trusts. The corporate IFA market is still doing what they know, which is still group personal pensions. That may be a reluctance to go into a master trust because of the lack of a safety net of a large provider, or just because they always have.”
“There is a degree of ‘you don’t change what you are doing everyday unless you have a reason to do it’ and the ability to do that additional choice,” agreed Willis.
Mistry added: “If you are working with a client who is not really interested in a master trust, who doesn’t have a big bulk of assets to transfer across and who wants something hands off and risk averse, a GPP or GSipp still works. Looking at pricing, GPPs come in a little cheaper when you are working on a like-for-like contributions-only basis, though as soon as you add assets, that is different.”
Panellists did not quite agree that GPPs were a last resort with French saying that a low cost, fixed price master trust such as the People’s Pension could fit the role as well.
Smith said it also required an insight into how master trusts were managing the flows of business. This could of course affect the wider market as well depending on who would accept that business.Panellists noted how Smart Pension were second only to Nest in terms of numbers of employers attracted, the majority of which had come late in the rollout process.
Mistry said much of this was down to the links to payroll providers given its technology, while French suggested that a lot of master trusts need to invest in their architecture and infrastructure due to requirements to trade and manage an audit trail of communications online.
Smith agreed that he saw a technology threat to traditional providers saying it is “really difficult to reconfigure systems for those cloud-based models”.
Critchley said: “If you are integrated with the major payroll providers which deliver to SMEs, you are going to have an advantage and if you don’t charge the employer anything, you are going to have an advantage. It doesn’t matter what your charge to the member so as long as it is compliant [with the charge cap].”
Panellists were clear that with master trust authorisation, standards will rise. But some won’t get over the new hurdles and that could have consequences for the industry’s reputation more generally.
Smith said: “The master trust authorisation is going to sort a lot of the mess out. I can only see the big getting bigger and the small disappearing, bringing higher standards to the master trust area next year. The bad guys are getting out.”Yet French asked whether there would be an orderly exit with bigger trusts acting as lifeboats or trusts consolidating.
Smith said: “I have seen evidence of smaller master trusts consolidating but whether they make it through the authorisation regime is open for debate. I don’t see any evidence of the big guys queuing up to take on dodgy data and poor records from poorly-run, small master trusts. TPR will have to manage something here.” French added: “The larger trusts will pick and choose who they take on.