Data crunch: The majority of master trusts are targeting defined contribution schemes in a bid to boost their assets under management, leading to heightened competition in a marketplace where there is scepticism about acquiring rivals.

The 2020 master trust survey by EY Pension Consulting showed that a clear majority of its 20 respondents are looking to absorb schemes within the £10m-£250m range, with an almost even split between those targeting the smaller schemes (£10m-£50m) and the bigger pension plans (£50m-£250m).

The master trust schemes incorporating sustainable investment and new technology into the mix, as well as ensuring engagement with consumers is strong, will ultimately be able to offer the most efficient platforms

Iain Brown, EY

Though consolidation in the master trust marketplace is widely expected, most do not view acquiring their rivals and competitors as a sure-fire way of growing their assets under management, a mindset the EY report stated makes maintaining market presence and visibility critical.

Though nine respondents said they would be willing to consider an acquisition in the right circumstances, only four said such a transaction was “most likely”.

“Providers will therefore need to combine credible market presence with a visibly strong product offering and focused pitch strategy in order to win new business,” the report stated.

A majority of master trusts expect to grow their AUM through transfers of “own trust” pension schemes of employers that have decided to switch into a master trust, usually following a tender process.

Fourteen respondents stated that this was their biggest source of growth, while six cited contribution growth, the preferred source for master trusts not actively seeking new business.

“This consolidation of the DC market is aligned to the stated direction of travel by the Department for Work and Pensions and the Pensions Regulator, where they see consolidation of smaller DC schemes into fewer, better-run schemes as a solution to improving both standards of DC governance and outcomes for members,” the report explained. 

“EY professionals have observed this consolidation in the market and expect it to continue. Undoubtedly, there will be winners and losers in this growth challenge, and providers risk becoming competitive if they cannot match the growth aspirations of their competitors,” it added.

Master trusts must demonstrate value for money

Iain Brown, UK pensions partner at EY, told Pensions Expert that this competition creates a need “to constantly demonstrate value for money”. 

“With market competition at an all-time high, consolidation is a cost-efficiency option that schemes frequently review. Restructuring and refining operating models to cope with the challenges an influx of assets creates is key in the current market.”

Mr Brown pointed to the survey’s findings showing the increased focus on environmental, social and governance integration as an example of master trusts attempting to position themselves at the forefront of market trends.

Seventeen respondents listed ESG integration as their primary strategy in the development of their investment offering over the next three years, while three said it was their secondary priority and one listed it as a tertiary priority.

Diversifying asset class ranges is also high on master trusts’ priorities, while very few respondents listed reducing fees and charges as an immediate goal.

“This suggests most providers believe there is little scope, or perhaps desire, to reduce charges further based on their existing size and operational capabilities within investment markets,” the report noted.

Mr Brown said: “Master trust schemes incorporating sustainable investment and new technology into the mix, as well as ensuring engagement with consumers is strong, will ultimately be able to offer the most efficient platforms and effective operational risk management.

“But the real winners will be those that can capture the £10m to £250m AUM segment, where there is a good balance between the cost of sales and growth and profit potential,” he added.

Investments remain equity-focused

Other findings of the survey show that master trusts, half of which use only a single asset manager, remain heavily equity-focused. This holds true whether the fund under consideration is a default fund or a self-select option, more than half of which are equity funds.

The survey showed that 82 per cent of members (representing 76 per cent of total master trust AUM) choose default arrangements, leading many providers to prioritise additional diversification.

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