Master trusts and the secondary market

What are the main considerations when moving from one master trust to another? 

The UK pension landscape is undergoing a period of significant transformation. Over the past decade, master trusts have gained considerable traction and moved from being a niche product to a mainstream DC solution.  

When any market matures, a “secondary market” is likely to develop and the master trust “secondary market” (which involves an employer moving from one master trust to another) has the potential to bring opportunities and risks for members, employers, and master trust providers.  

Whilst activity has been relatively modest so far, and largely influenced by corporate activity, both at employer and master trust level, instances where employers are making an active choice to switch to an alternative master trust are increasing; the main drivers being access to better or more sustainable solutions to meet their needs and those of their employees.  

The Chancellor’s announcement on 14 November 2024 and the accompanying “Unlocking the UK pensions market for growth” consultation provides further food for thought. It explores employer responsibilities for considering the “value” of the workplace pension they provide and asks whether these pension arrangements should be periodically reviewed every 3 to 5 years; the consultation also considers minimum assets under management (AuM) requirements for multi-employer arrangements such as master trusts.  

If these measures are implemented, they are likely to further stimulate secondary market activity, making it essential for us to consider how to effectively deal with moves from one master trust to another.  

Navigating complexities

Although the concept is simple, there are often complexities to navigate when moving from one master trust to another. These can be due to the interaction between the commercial dynamics and the broader legal and regulatory requirements (including trustees’ fiduciary duties) as well as the different structures of master trusts. 

One area of considerable debate is whether deferred members – ex-employees – should follow the employer if they decide to move to another master trust. There is no standard answer to this, and it will very much depend on the specific circumstances of the transfer and the master trusts involved.  

The additional scale that a deferred member population brings can increase buying power but it’s not always the case; it’s a widely debated element of many master trust to master trust transactions with differing views from various stakeholders.  

The ceding trustees are responsible for approving the transfer of the accrued pension pots and will need to be assured that it is in members’ best interests to move to another master trust. This must be demonstrated, and it could be better for certain cohorts to remain with their current master trust. The ceding trustees will also need to ensure that a request to transfer out isn’t to the detriment of the remaining members, which isn’t always visible.

Things to think about

• It’s important to recognise that master trust arrangements are different, with varying scheme rules, terms and conditions and numerous other factors. These can significantly influence the approach and requirements of both the ceding and receiving master trusts.  
• Be clear on the outcomes that the change in master trust could have for each distinct group of members – it may well be in the interests of certain cohorts to remain where they are.  
• There are multiple stakeholders to consider, each with their own interests and perspectives. It’s important to identify who they are, understand their requirements and who is responsible for delivering what.  
• Consider the costs, clarify who pays and explore if there’s room for negotiation. This could include a Value for Money assessment. 
• Be clear on the member engagement strategy and who will be communicating what, to whom and when. It may sound obvious but different stakeholders carry different responsibilities so co-ordination, as well as aligned messaging, is key to ensuring member confidence.  
• Finally, be aware that if the ceding master trust has invoked Continuity Option One (to wind up) there are likely to be additional regulatory requirements and timescales that must be met.

Looking ahead

With more master trusts looking to diversify and increase their allocations into less liquid assets, it is important to consider how this may influence the future speed, cost and complexity of secondary market transfers. Employers looking for timely exits from a master trust may not be able to achieve what they wish for in the desired timescales.      

The issue of introducing greater regulation in this area, and the advisers involved, has been brought up once more in the “Unlocking the UK Pensions Market for Growth” consultation. It has also been highlighted by the Competition and Markets Authority in the past, and while regulation is not currently mandated, many believe that its introduction could enhance standards and expertise in the field.  

There have also been calls for more guidance from The Pensions Regulator but, in the meantime, let’s look for opportunities for the industry to work together to help improve clarity and remove some of the known barriers and challenges.