Data crunch: Consolidation is an ongoing and pervasive trend in UK pensions. The push is being driven by the government and regulators, who believe small schemes deliver poor outcomes for their members, a problem that can be alleviated by scale.
The range of consolidation options now available is broad, with specific segments of the UK’s diverse pensions universe demonstrating different approaches.
In private defined benefit, for instance, fiduciary management has proven popular. This option allows trustees to delegate investment decision-making to a third party but retain strategic control.
Superfunds, a much deeper form of consolidation for DB schemes, which involves severing the scheme from the sponsor, are now close to their first transactions having been stuck in a regulatory quagmire for some time. For the Local Government Pension Scheme, pooling has provided underlying funds the clout to access a more diverse array of asset classes at lower costs.
Employers have sought master trusts as a means of alleviating governance burdens and reducing reputational risk
But nowhere has the story been more pronounced than in the UK’s defined contribution market, where master trusts have swept up a vast number of clients, with more than half of active memberships concentrated in these vehicles.
Master trusts combine the buying power of schemes within a single structure, creating economies of scale to reduce investment and administration costs, while placing decision-making responsibilities under the purview of a single, independent trustee board.
In theory, there are a plethora of reasons for schemes to use master trusts, with the most prevalent detailed below. 
Starting from the bottom, both the investment range and retirement offering provided by master trusts are of relatively little importance, with a respective 18 per cent and 5 per cent of our survey respondents mentioning these issues.
We think these considerations are typically more important to larger, more established single employer trusts looking to transfer. For these types of scheme, bespoke investment arrangements may be expected as they are looking for help in navigating the complex world of retirement support.
Next up is costs, cited by just under a third of our respondents.
Unsurprisingly, auto-enrolment and administration figure near the top of the list — with 42 per cent of respondents mentioning these motivations. Certain master trusts were set up to deliver commoditised pension provision with minimal effort required on behalf of employers looking for a simple, light-touch solution.
The overwhelming majority of the hundreds of thousands of employers currently sitting on the books of master trusts made their way to these vehicles via this route. Effective member communications are also vital to the story.
But at the top of the list falls governance. With an increasing number of requirements placed on DC fiduciaries, schemes have struggled to find the resources necessary to meet all of their obligations while continuing to improve member outcomes.
Recent extensions to disclosures on environmental, social and governance risks provide one such example. Employers have sought master trusts as a means of alleviating governance burdens and reducing reputational risk.
We have big expectations for the master trust market. A combination of steady contributions from millions of active members and a stream of transfers from the single employer space means that some will rise to be among the largest asset owners in the UK.
They also provide an important lesson, which should inform consolidation ventures elsewhere in the UK pensions landscape — that better governance is key to any proposed solution.
Hal La Thangue is senior consultant in the global insights team at Broadridge Financial Solutions
