Blue chips rush to offload DC pension plans to master trusts

Commenting on the move, the chair of trustees of the Vodafone DC Plan explains the background for the change: “Although the decision to switch future contributions to LifeSight was a Vodafone decision (subject to employee consultation), the trustee directors reviewed LifeSight in relation to the proposal to transfer DC accounts which have already built up under the DC plan to LifeSight.”

He says the master trust “has a number of advantageous features including the additional options at retirement, a wider range of investment strategies with several funds either having lower or matching charges, strong governance of members’ funds and the increased support at retirement”.

I recently heard a well-known trustee saying that he starts every trustee meeting with the question, ‘What can we do ensure that we don’t need to have many more trustee meetings?’

Bill Finch, Salvus Master Trust

Vodafone’s switch into a master trust exemplifies a trend for consolidation, even in larger own-trust DC arrangements. While the rush for scale in the auto-enrolment-focused end of the master trust market has seen providers merging with one another to accumulate small employers’ business quickly, other providers have chosen to compete for big names, emphasising their range of services to win profitable contracts.

Jane Kola, partner at Arc Pensions Law, says she expects “many will follow in Vodafone’s footsteps. These products offer a good range of funds very low charges and glossy member communications. Scale equals lower costs per member, which keeps the charges down and reduces costs for the employers as well as the risks of seeking to run your own scheme.”

Robert Thomas, a trustee director at Law Debenture and member of the APPT council, says: “Employers are looking at benefits packages and asking themselves whether it’s worth continuing to run their own DC pensions trusts."

Indeed, LifeSight is a big beneficiary of the fashion to outsource pension provision. Another big win for the 185,000-member master trust this month is Fujitsu, which is transferring 17,000 members and £730m of assets from its DC plan. In February, Axa UK was also reported to be consulting its members over a transfer to LifeSight.

LifeSight managing director, Fiona Matthews, explains: “As an IT technology company, Fujitsu wanted someone with similar standards of engagement and communication. On the first day of going live, 30 per cent of members logged into their LifeSight account to review their pension and that has subsequently increased to over 40 per cent.”

Ms Matthews adds: “The organisations we are talking to are looking to improve the quality of their governance. They want to increase member engagement – while looking for value for money, which master trusts can bring – and to reduce costs.”

Sustainability can be a key factor. One recent acquisition stands out in Ms Matthews’ mind. “Carillion went live last year. The company wound up and the trustee was left to find a secure home for members, knowing there wasn’t an employer with somebody still around to care about members.” 

Continued momentum in market

After a hiccup in the sector last year from the master trust authorisation process, the momentum of DC consolidation continues apace “with new proposals coming in every week” says Ms Matthews. 

Adding fuel to the fire, Bill Finch, head of sales at Salvus Master Trust, notes: “I recently heard a well-known trustee saying that he starts every trustee meeting with the question, ‘What can we do ensure that we don’t need to have many more trustee meetings?’. More trustees are considering the master trust route as a means of discharging liabilities.”

Indeed, a recent Aon DC survey found that one in three trust-based schemes (1 in 5 contract-based) schemes expect to wind up into a master trust in the next five years.

“We are moving into an area where it is increasingly about scale in order to offer a good member outcome,” stresses Philip Smith, director of DC, TPT Retirement Solutions.

Master trusts already look after the assets of over 10m UK DC savers, with their share of the workplace pensions market expected to grow to £400bn in 2026 from £20bn today, according to Hymans Robertson research.

“Over the last six months there has been a race from company sponsors and trusts to consider this option,” points out Mike Ambery, head of provider relations at Hymans. He adds: “This doesn’t mean it is right for every trust-based vehicle. The largest, well-governed schemes will continue to stand alone but for the majority the opportunity to move to a master trust is compelling.”

Claire van Rees, partner at Sackers, notes: “Typically, it is employers who are driving the proposal to move to using a master trust.” 

She says requirements like the new chairs’ statements have increased governance and cost burdens, while master trusts have also developed better functionality for members.

“Often, employers are finding that master trusts can offer the same or lower charges than their own occupational DC scheme is able to negotiate, with perceived higher standards of governance and administration,” she says

What employers expect from a master trust provider

Trustees seeking to consolidate with a master trust often look to replicate their own scheme’s existing features.

Kate Smith, head of pensions at Aegon, stresses: “The larger employers will want a range of member services such as online tools, a pension and savings app, newsletters, a good range of self-select funds, including environmental, social, and governance options, member guidance and advice services and access to provision of retirement options such as in-scheme drawdown. They may also demand additional services such as a workplace Isa and wellbeing support for employees.”

Retirement service is a key point of competition, with some providers lagging. Laura Myers, head of DC at Lane Clark & Peacock, says some larger corporates’ minimum requirements include “members being able to access the full range of pension freedoms in the scheme – which surprisingly not all master trusts do yet”.

She says larger employers tend to carry over their bespoke communications and engagement strategy and are more likely to request that their current investment strategy is replicated in the master trust, “as they believe it’s more suitable to their workforce and it will save members the (not insignificant) transaction costs of moving to a new investment strategy”.

“We’re also seeing a desire for continued governance by the corporate, so master trusts that can provide data to help with that is a real positive,” she says.

Finally, Ms Kola adds a note of caution to trustees considering a switch. “They need to be careful to ask for at least a continuation of contribution rates, check the charges add up and are as described, look at how members get access to and are educated by the new arrangement and ensure the fund choice is fit for purpose.”

She highlights administration as a very important factor: “Some providers’ administration does not stand up to scrutiny with failures of straight-through processing and slow management of member requests. Data protection compliance can also be a concern, with at least one provider who is reputed to routinely send the wrong paperwork to the wrong people.”