Need to know:
- Master trusts offer a cost-effective solution that harnesses economies of scale and relieves employers of a growing regulatory burden around pensions.
- Many are using technology to forge ahead with developments such as open banking, and flexible drawdown.
- Value-added services can help employees build financial resilience in the short-term, as well as in retirement.
There are now around 36 authorised master trusts, in a market that has expanded rapidly as employers look for solutions to unshackle themselves from the regulatory burden of pension provision and take advantage of economies of scale.
As this market grows, the time is right for organisations to understand how best to make master trusts work for them and their employees.
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Master trusts are targeting employers that currently offer auto-enrolment plans or group personal pensions (GPPs), and employers with occupational arrangements, where switching to a master trust could offer substantial cost savings.
Martin Palmer, head of Aviva Master Trust, says: “Employers with occupational schemes are focusing on the costs, governance and risk of their schemes. These are significant, such as the trustee board and advisers, and regulatory obligations have certainly been ramped up, such as schemes having to demonstrate value for money, and government pressure to invest in illiquids and report on climate change.”
For some employers, the value for money assessments, which came into force in October 2021, were the final straw. Every scheme under £100m is expected to undergo an annual exercise where it compares itself with three other schemes, taking account of charges, services and investment. The outcome must then be reported in its chair’s statement and sent to The Pensions Regulator (TPR). If the trustees cannot demonstrate that their scheme offers value, they will be expected to transfer members into an alternative scheme.
TPR has also been pushing the concept that larger schemes offer better outcomes for pension savers.
James Carter, head of pension products and policy at Fidelity International, says: “While the government has recently ruled out an immediate extension of regulation specifically intended to prompt consolidation of larger schemes, there are other initiatives which promote the benefits of scale, such as the drive to embrace more sophisticated investment techniques, including illiquid assets.
“Keeping pace with regulatory change in a way that enhances member experience and outcomes is often a greater challenge for smaller schemes.”
A changing market
The potential market for master trusts is huge, as every UK employer, no matter how small, must offer a pension. Aviva, one of the largest schemes, expects the market to grow between 20% and 25% for at least five years.
Craig Rimmer, policy lead, master trusts at the Pensions and Lifetime Savings Association (PLSA), says: “In fact, some of the master trusts that one might consider smaller have quite aggressive growth plans, based not only on attracting new employers, but on the growth of the underlying investments.”
In addition to its own growth, the master trust market is able to cater for changing trends in terms of the wants and needs of savers. For example, as consumers look for a financial wellbeing option that also takes into account environmental, social and governance (ESG) factors, businesses like Cushon, which has taken over three master trusts in two years, aim to provide an ethical approach.
Ben Pollard, chief executive officer (CEO) of Cushon, says: “Historically, the issue for larger free-standing schemes has been the lack of real alternatives in the market; they care about their members and need to be convinced that there is a better alternative outside of the organisation.
“Thankfully, there are now providers that offer a real alternative to in-house schemes, with innovations such as technology allowing people to manage their money 24/7, or funds that focus on sustainability and issues members care about.”
Master trusts have made significant investments in technology, offering, for example, digital approaches such as nudges and alerts to create the best member engagement strategies. There are also analytical tools for employers to gain insight into members’ behaviour to highlight opportunities or concerns.
Shabna Islam, head of DC provider relations at Hymans Robertson, says: “Employers are demanding more, and employees need more help, not just on pensions but wider financial wellbeing.
“Digital enhancements offer the flexibility to see all savings in one place, with master trusts offering application programming interface (API) solutions with open banking. Savers can see their savings account, mortgages and previous pension accounts alongside their current pension account, providing a single view or dashboard.”
Some master trusts offer the choice of flexible access drawdown in the retirement phase, which is usually not achievable even in large own trusts.
Dan Smith, head of UK and cross-border distribution at Fidelity International, says: “Few large plans offer full retirement flexibilities due to the additional governance risk of retired members in the plan.
“Similarly while a trustee board is capable of dealing with sustainability and alternative asset classes, it can prove expensive and only the very biggest plans have enough scale and assets to realistically match the investment flexibility of a master trust.”
Offering an individual saving account (Isa) alongside the pension is also becoming more common. Standard Life, for example, has signed a deal with Cushon to provide savings propositions such as Isas for the workforce.
Gail Izat, workplace pensions director at Standard Life, says: “It is an important part of the proposition to help employees saving for the short term. Our younger members are primarily worried about getting onto the housing ladder, and we provide Homebuyer Hub on our app, which offers personalised guidance to members buying their first home, taking account of their income, savings goals, location and timeframe.
“Our experience is that if you empower people, such as helping the less well off to budget, this builds confidence and competence.”