Uncertainty and market jostling will greet the enforcement of the mastertrust authorisation regime in October, but the end result should benefit members, according to Stephen Coates at JLT Employee Benefits.
One of the principal influencing factors will be the new mastertrust authorisation regime, introduced by the Pensions Schemes Act 2017.
The requirements are not for the faint-hearted, and it will certainly sort the wheat from the chaff. Schemes will need to demonstrate that those designated to oversee them are ‘fit and proper’, and they will need to provide detailed evidence of financial sustainability and back this up with comprehensive business plans.
Having fewer schemes reduces costs and can help maintain market confidence in auto-enrolment. This is effectively a cull to protect the herd
Continuity strategies and wind-up plans, in the event of failure, all need to be planned and documented. Registration costs are not insignificant, but the costs associated with ongoing compliance may prove even more burdensome.
As a result, some mastertrust providers will fall on their sword now, not even bothering to apply for authorisation, and others may not pass muster when the analysis has been concluded.
Poor governance threatens AE reputation
Taken at face value, this is a move by the government to make mastertrusts as accountable as their workplace cousins, the group personal pension plans and own-trust schemes.
Pension schemes exist, ultimately, to serve the members, and the regime is about ensuring that workplace savings are safe regardless of the vehicle used to provide them.
However, there may well be other motives at work here. The mastertrust market is clearly oversaturated and, as such, the cost of regulation is high.
After the success of auto-enrolment, the government wants to protect the integrity and ‘good name’ of the mastertrust – the vehicle of choice for employers operating auto-enrolment schemes.
Equally, it wants to ensure that the automatic enrolment policy itself does not lose credibility. The more schemes that are out there, the harder this is to control. Having fewer schemes reduces costs and can help maintain market confidence in auto-enrolment. This is effectively a cull to protect the herd.
Scale is king
But it’s not just regulation that is driving change; market forces are also at play. Auto-enrolment has largely run its course and the initial land grab is over.
As pension providers step back and take a breather to assess the fruits of their labour over the past six years, we can start to see who the winners and losers might be.
The main factor is assets under management – scale and assets will determine the future sustainability of most mastertrusts. If you haven’t achieved that scale by now, it’s going to be very hard to recover from this position in the short term.
In the interests of survival, some mastertrust providers may look for alliances and mergers with competitors, others may look to be bought or assimilated into a larger scheme. Some may simply hold up their hands and call it a day. Whatever the reasons, not everyone will survive.
Estimates of the size of the market currently range from anything between 60 to more than 80. In our view it’s nearer 55 and we see this falling to as low as 15 over the next five years.
Benefits of scale should be passed on
So what will it mean for members? In the final analysis, it should work in their favour. Fewer schemes will mean bigger schemes, which creates greater economies of scale and lower charges. Compliance with regulation will create safer, more resilient products, meaning members’ savings are better protected.
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The products themselves are likely to become more homogenised and less distinguishable from each other. This is unlikely to matter for the vast majority of savers, who simply want a product that is safe, competitive, and simple.
But this is still a long way off. In the meantime, expect uncertainty and plenty of market jostling as the regulation bites and deals are struck. It’ll be up to trustees, advisers and the Pensions Regulator to make sure we continue to keep in mind the most important element in all of this – the members.
Stephen Coates is a principal at consultancy JLT Employee Benefits
