Pressure is building on the capacity in the master trust industry to pitch for and onboard new clients – the winners are growing bigger and the losers are questioning their own independent futures. New regulation looks likely to contribute to a wave of consolidation that will reduce the number of own trust DC schemes serving employees’ needs, with them most often heading for the security of the master trust environment. As a result, there is a growing risk that employers and own trust defined contribution (DC) schemes may be exposed to undue uncertainty as membership bases experience changing hands, potentially many times, due to consolidation processes that are beyond their control.
At the core of the issue is regulatory changes that are reshaping the master trust market: master trust authorisation requires them to act in the best interests of their members, delivering value for money to customers while remaining profitable; and, own trust based DC schemes under £100m are having to assess their own futures and compare the value they provide members against other provision. This has caused a number of existing schemes to acknowledge that they cannot survive alone.
With so much change and new interest in the master trust market, the issue of selecting the most appropriate new provider could well be the defining decision of the next decade for many trustees and employers. But picking the right provider against a backdrop of industry consolidation is tough. The imperative is to protect members from uncertainty while promoting autonomy and control over decision making. The key is to select a master trust that will be amongst the last standing, but with a market in which the number of viable providers risks rapid decline, this is easier said than done.
In a scenario where the number of master trusts falls to, for example, a dozen over the course of the next decade, the strain on consolidators to process new business and then incorporate and administrate relatively large assets will be considerable. The benefits of size and scale will enhance competitiveness and differentiation, but this growth will not be without significant initial challenges that may affect availability and choice for employers.
There are other factors that could compound the capacity squeeze. The DC market is vast and growing. Post-auto enrolment, every employer has a DC plan to enrol their members in and providers will need increasingly sophisticated technology and personnel to service their needs properly. It is likely that, with consolidation driving scale, efficiency and sophistication in the DC landscape, employers and members will increasingly experience the benefits of enlarged schemes’ size and scale first-hand.
This in turn could increase the demand for better service, causing a snowballing effect of demand for these bigger schemes. Consolidation will lead to consolidation which is a good net outcome, but we must not rule out a period in which we see a significant capacity squeeze in the industry that will potentially see growth without the people or systems required to service it.
While not all businesses face the same risk of experiencing a potential capacity squeeze, many providers that exist post-consolidation will be forced to make tough decisions. Should they invest in more people or upgrade their systems? If so, when should they integrate these in order to help deal with the volume of new business that is headed their way? Those who set a course now to enable future growth will reap the benefits.
Decisions around insourcing versus outsourcing will need to be made too. Third-party resources that are able to scale up and down with the resource requirements of providers, as their activity peaks and troughs with the market, will be well placed to respond to a changing market. These facilities are valuable as they help to avoid the fixed costs and commitments of in-house resources while producing the flexibility required to offer great service and solutions to a large influx of potential clients.
For employers and own trust trustees, the onus will fall on them to ensure the provider they pick today is one of the last standing in a market that is likely to see a rapid reduction in master trust service providers in the coming years. Identifying which schemes are most stable, provide value for money now and in the future, and have taken due care to future proof their capacity to accommodate new business will be the order of the day.