Is this the mastertrust’s time?

This may have been attributable to the tax rules at the time, which favoured the trust-based approach, but it was also because employers were seeking to preserve their paternalism. 

In the background, individual personal pensions were gaining popularity and the 90s saw the rise of corporate IFAs and the use of group personal pensions plans, stakeholders and group SIPPs.

A mastertrust allows employers to unburden themselves of their governance responsibilities above the agreed contribution rate

These ‘contract-based’ plans were attractive to employers not wanting responsibility beyond the agreed contribution rate, with costs – including advice through commission – met by the employee.

They were also picked up by the traditional consultants who, particularly following ‘A-day’, increasingly started to recommend GPPs.

Missed trick?

However, there was a pensions vehicle that could have achieved all this and more but was being overlooked – the mastertrust.

Like a GPP, a mastertrust allows employers to unburden themselves of their governance responsibilities above the agreed contribution rate.

Unlike a GPP, however, this allows employers to maintain the strongest levels of governance by passing this responsibility to an independent trustee body; an attractive proposition with DC regulation becoming more complex.

Perhaps it was freedom and choice that exposed the real flaw in contract-based GPPs. A product designed for and owned by an individual requires ongoing engagement, but once they are lumped together in a group pension arrangement, that level of engagement is lost. And with it the ability to make modifications for their benefit, such as significant changes to a default strategy.  

Varied market

There are apparently somewhere between 70 and 100 mastertrusts in the UK. Although they are habitually lumped together, they are not a homogenous mass.  

At one extreme you have the mass-market vehicles set up to meet the demands of auto-enrolment and compete with Nest. These are typically off-the-shelf, one-size-fits-all solutions open to all employers.

At the other end of the spectrum you have a customised approach that combines the flexibility of a company’s own scheme with tailored default options, communication and administration outsourced to governance experts.  

Somewhere in the middle of the spectrum are the life companies and consultants.

Some life companies always had mastertrust products in the background, but these were largely ignored while their GPPs were flying off the shelves. Others have since jumped on the bandwagon and bolted mastertrusts onto their existing offering.  

More recently, employee benefits consultants have entered the fray. Having previously provided many of the moving parts for single trust schemes (ie administration, investment consulting and communications), and having witnessed the market moving to mastertrusts, this must seem necessary to protect their business.

We have seen consultants reposition themselves as providers in the DB fiduciary space, and they will need to manage the same external challenges regarding conflicts of interest.

Finally, we have some opportunists currently worrying the industry, regulators and government, and driving the need for additional member protections. These mastertrusts seek to exploit the opportunity created by auto-enrolment. Many are indistinguishable from the company behind them and their business plans require an unrealistic market share to succeed.

With their members ultimately responsible for any wind-up costs, their potential failure is clearly a major concern.

The future?

Consolidation is inevitable and mastertrusts will soon be operating within a changed regulatory environment.

Moving from voluntary to mandatory assurance will benefit members, albeit some caution is warranted.

Mandatory assurance and solvency requirements could lead to some sponsors walking away, resulting in member-funded wind-ups and achieving the opposite of the regulatory intent.

However, all mastertrusts must be able to demonstrate how they calculate and reserve a sufficient sum to facilitate an orderly wind-up.  

David Snowdon DC director at SEI