How will lifting the restrictions on Nest impact the mastertrust market?

With Nest’s adoption of a mastertrust structure and the advent of auto-enrolment, we saw the market expand rapidly with life companies, benefit consultants and administrators launching mastertrusts in an attempt to capture a mathematically impossible share of the marketplace.

Whether the current number of mastertrusts on the market is 60 or 100, we have clearly gone from ‘surprisingly few’ to ‘far too many’ in an incredibly short space of time.

Newer mastertrusts will feel impact most

The mastertrust market can be split into two broad categories. The first – let’s call them ‘traditional mastertrusts’ – serve the larger end of the market and predate auto-enrolment. To a greater or lesser extent they provide tailored solutions to employers and trustees.

It is difficult to argue against removing the restrictions when doing so could improve retirement outcomes for millions of Nest’s members

The second, let’s call them ‘auto–enrolment mastertrusts’, arose as a direct result of auto-enrolment legislation and were created to compete with Nest. They provide employers with a one-size-fits-all solution to meet their employer duties.

These restrictions – and the light-touch DC regulations that allowed the new auto–enrolment mastertrusts to proliferate – date back to a time when the government was worried about a capacity crunch.

Back then, the mainstream providers were incapable and/or unwilling to take on the flood of smaller employers who would shortly need to provide access to a workplace pension scheme. Those fears have since been replaced by government’s concerns around sustainability, protections and confidence, as has been clearly evidenced by the new pensions bill. 

When Nest’s restrictions on transfers and contributions are lifted in April this year, it's the auto–enrolment mastertrusts that will feel the impact. Considering they were actively encouraged to join a marketplace with few barriers to entry and restrictions that gave them a competitive edge over Nest, they could justifiably feel a little aggrieved.

However, it is difficult to argue against removing the restrictions when doing so could improve retirement outcomes for millions of Nest’s members.   

Lifting Nest restrictions can be catalyst for improvements

Lifting the restrictions on Nest should serve as a catalyst for improvements across all auto–enrolment mastertrusts. The leading providers will have already been reviewing their propositions in order to develop some competitive advantages over Nest.

Lowering their charges is probably unrealistic, so it is most likely that innovations will come in the form of enhanced value for members through new services and/or investment solutions. 

Additional support for employers, using technology and adopting best practice from some of the traditional mastertrusts can help build a more positive view of savings across the smaller employers, which could prove hugely important ahead of the increase to minimum contributions next year. 

The lifting of restrictions is one of many factors likely to precipitate change in the mastertrust market. Along with a pensions bill to help shape a sustainable market with enhanced member protections, we have a DC bulk transfer consultation that could result in far greater flexibility for employers and trustees looking to make a change.

While we must be mindful of the potential impact on members of the auto-enrolment mastertrusts that do not survive in the longer term, the removal of the transfer restrictions in April could conveniently pave the way for Nest to become a provider of last resort should schemes need to be wound up.      

Ultimately, we can look forward to a more rational, dynamic and innovative marketplace – one that we always envisaged it would become, made up of well-established, reputable providers, offering a choice of high-quality products to the markets they were designed to serve. 

David Snowdon is director of institutional DC solutions at SEI’s Institutional Group