DC consolidation - The move to Master Trusts

Sharon Bellingham, Master Trust Lead at Scottish Widows, provides an update on the latest developments and the impact that regulatory change has on DC consolidation.

The volume of Defined Contribution (DC) schemes moving into master trusts has amplified, as 23.7 million people are saving for retirement in a master trust.¹ And this trend is set to continue, with research from Broadridge indicating that assets held under master trusts will reach £461 billion by 2029.² It’s not all plain sailing though – there can be challenges along the way and complexity which may be creating barriers to change.

Regulatory Driven Change

In recent years, the clear and stated ambition from The Pensions Regulator (TPR) has been to encourage smaller and less well-governed schemes to consider whether they demonstrate best value for members. Delivering value for money in pensions is a key priority for TPR, as is driving a shift in focus from cost to value.

On a backdrop of unrelenting regulatory activity and the continuous evolution of disclosure requirements, trustees and sponsors are facing an ever-growing call on time, effort and cost. This call on resource and budget is significant, even for the more sizeable schemes, and it’s likely that many smaller schemes will not have the same means as their larger counterparts. 

It’s important to note that not all small schemes are poorly governed, and many can demonstrate how they offer value for members. However, a recent survey published by TPR talks to the challenges;³ it highlights how smaller schemes are more likely to be failing to meet expectations, particularly in terms of assessing value as 64% of small schemes were unaware of the value for members assessment requirement. Furthermore, whilst 86% of large schemes were assessing financial risks and opportunities associated with climate change, this fell to around 4% for small schemes and 8% for micro schemes. 

Against this backdrop, we would therefore expect to see consolidation at its most active amongst the smaller schemes – but the TPR’s most recent scheme return data paints a slightly different picture. Whilst it’s clear that the overall DC market has been subject to further concentration, it tells us that more change is occurring amongst the medium and large schemes (1,000 to 4,999 members), rather than amongst the smaller schemes.¹

Overcoming Barriers

It’s clear that there are barriers which are preventing smaller schemes from making a change.

Cost and complexity of change is likely to be a key consideration for many – whilst fully outsourcing to the master trust model can reduce long term costs, the upfront financial outlay (including professional advice costs) and time commitment could be significant. 

The presence of legacy rights may also be a detractor for some – we shouldn’t underestimate the presence of complexities, particularly in older schemes, and which may not be immediately visible. Real care must be taken where these valuable rights exist, such as generous pre ‘A-day’ protections and other guarantees that may have been promised in the 80s and 90s when annuity rates were significantly higher.

These benefits can be challenging and costly for trustees and employers to unpick, and how they’re addressed must be carefully thought through. It’s paramount that members are not worse off as a result of a move to a master trust. 

Future Considerations

Master trust authorisation and the ongoing supervisory requirements, provide us all with confidence that master trusts are well governed and sustainable. The Authorisation and Supervisory regime has generally achieved what it set out to do, with the result being greater consumer protection and market consolidation. We operate within a well-regulated and robust framework that offers security and value for members.

Looking ahead, as the overall number of single employer trust arrangements continues to fall, a handful of ‘mega’ schemes will remain – those with significant scale and a robust operating model that can support good member outcomes. It’s likely that remaining schemes will be supervised more closely – and it’s reasonable to conclude that the supervisory regime will be extended to cover the remaining trust-based schemes.   

The introduction of further ‘regulatory levers’ will no doubt influence future direction. A new enforcement policy is now in place and a further (significant) lever within TPR’s gift would be the introduction of financial reserving as we now have for master trusts. In simple terms, this would require employers to set aside ring-fenced capital to meet scheme closure costs as master trusts are currently required to. Many employers would have limited appetite to set aside this level of capital in this way.  

Given the level of consolidation activity, most master trusts aren’t overly relying on acquisition for growth in the short term. In the medium to longer term however, master trust market rationalisation is still very much on the cards – it’s a highly competitive market where scale is key; very much survival of the fittest and most committed. 

Whilst it's clear that the regulatory glare is currently focusing on ‘small’ schemes, the move to master trusts reaches far and wide across the workplace spectrum. Many large schemes are also recognising that master trusts such as the Scottish Widows Master Trust can support good outcomes and offer value for members, as well as considerable flexibility and tailored solutions.

Notes to Editor

[1] According to The Pensions Regulator, DC trust: scheme return data 2022 to 2023.

[2] According to Broadridge, Broadridge Navigator Report 2021. 

[3] According to The Pensions Regulator, Too many small DC schemes failing to meet expectations on value, survey shows.