Tony Pugh: Master trust consolidation implications for employers and members


One of the biggest success stories from the last five years of pensions auto-enrolment has been the growth of the master trust market, with over 14 million savers now enrolled in master trust schemes.

While many providers rose to the challenge of providing well-run schemes for members and their employers, others have been less well governed. The latter are now recognising that the new wide-ranging requirements of The Pensions Regulator’s (TPR) Master Trust Authorisation (MTA) regime are beyond their governance capabilities; this realisation is accelerating the pace of master trust consolidation.

Introduced as part of the Pensions Schemes Act 2017, MTA has set robust governance and financial requirements for all master trusts, including the need to hold sufficient capital reserves to cover the cost of wind-up. These demands have started to narrow the market but will enhance member protection.

Consolidation activity is expected to increase as more schemes complete authorisation and are able to focus on making acquisitions. That has implications for the master trust market, as well as employers and members.

The market view

After authorisation, schemes must meet a stringent, evolving set of standards to continue to operate. Those ongoing demands may mean that more master trusts decide to wind up over time.

To wind up, a master trust must transfer its assets and members to another master trust or other appropriate arrangement. However, this process is not straightforward, and acquiring schemes will involve considerable due diligence. Any move must be in the interests of the members of the acquiring master trust, as well as the scheme being acquired.

Every master trust must now hold financial reserves linked to the size of the plan, so an acquiring scheme will need to increase its reserves to cover the scheme in wind-up as well. The acquiring scheme will also need to rewrite its business plan and continuity strategy. Not all schemes in wind-up will be attractive to other providers, even if the reserves can be covered. The quality of the data and mix of assets held by a scheme is likely to be a significant factor in finding an acquirer: few schemes will want to resolve years of inadequate record-keeping, for example.

The employer view

Navigating the future – Aon defined contribution survey 2017, published in 2018 showed that 34% of employers with a single-trust defined contribution (DC) pension plan intend to change to a master trust within the next few years. Many large employers have complex, multi-scheme arrangements. Employers may see consolidating into a master trust as a way of harmonising benefits, as well as reducing the time, cost and risk associated with running multiple schemes.

Additionally, as DC scheme governance has become more complex and the requirements for trustees have toughened, single-employer trust-based schemes may not now have the required skills and experience to manage their plan effectively. Larger employers looking to outsource and consolidate their pension arrangements will want to find a good-quality master trust that is able to respond to the needs of their specific membership, rather than offering an inflexible off-the-shelf approach. This applies to communications and engagement, as well as to investment.

The member view

Overall, the new MTA regime means members should receive better quality pensions from a smaller number of schemes. As they increase in scale, master trusts will need to be able to maintain quality and focus on engaging individuals through sophisticated, targeted communications.

Master trusts will also require a forward-thinking approach to data management and information sharing. In future, members may want to consolidate their personal savings by transferring in pensions from other providers to make their retirement savings easier to manage, viewing their pensions as part of their wider personal wealth.

The next few years will see significant growth in assets and members through authorised master trusts. In return, master trusts need to provide exceptional value and service, always remembering that employer and member needs differ and should be responded to accordingly to deliver better member outcomes.

Tony Pugh is head of DC solutions at Aon