Daniela Silcock: Why master trusts have become the pension destination of choice

Daniela Silcock - pension

Master trusts have come into their own over the past 10 years. From a niche arrangement pre-automatic enrolment, master trusts have become the pension scheme type into which 84% of employees are enrolled.

Pensions Policy Institute (PPI) modelling expects that out of around 15 million active defined contribution (DC) pension savers in 2041, 10.6 million will be in master trust schemes.

To understand the rise of master trusts, we need to go back to earlier this century, and to what was happening with private sector defined benefit (DB) schemes.

A series of policy changes, economic effects and unexpectedly high increases in life expectancy resulted in an increase in DB scheme liabilities and a decrease in future expected funding.

Private sector DB provision declined, and employers began to offer access to group personal pension (GPP) DC schemes instead. When automatic-enrolment was being designed, it became clear that the majority of private sector employers would need to use a GPP scheme.

However, GPP schemes are not necessarily run with people in the automatic-enrolment target group in mind: people on low incomes, with low financial capability and frequent job changes.

Those offering GPPs may not be willing to write a scheme for an organisation with many low income employees, and the charges in these types of schemes may be too high.

This led to the government providing a loan for the establishment of the National Employment Savings Trust (Nest). Nest, while DC, differs from GPPs in that it is one scheme offered to all employers, rather than individual underwritten schemes, and is run by a board of trustees.

The establishment of Nest motivated other providers to set up master trust schemes to offer to those automatically enrolling.

Master trust schemes are well suited to automatic-enrolment, as the pooled administration means that charges can be lower than in GPPs, and communication and default funds are designed with the risk preferences, behaviour and financial capability of the target group in mind.

Master trusts also tend to offer employer portals designed to help determine the employee eligibility and required pension contributions.

As a result, master trust schemes have become the pension destination of choice for many employers, and these schemes are likely to be responsible for providing retirement income to a large proportion of future pensioners.

It is vital that policymakers support master trust schemes to continue providing the best possible service to members, so that people have the opportunity to achieve optimal outcomes in retirement.

Daniela Silcock is head of policy research at the Pensions Policy Institute