Welcome to this latest in our ‘mini-series’ of blogs with Rebecca McKay from Trowers & Hamlins on current issues facing DC pension schemes. In this edition we are going to focus on Master Trusts; the impact they are having on the market, and how the ‘authorised’ playing field, created by the Regulator, may not be as level as we are all led to believe.
The title references Chief Brody’s quote in ‘Jaws’ after he encounters the shark for the first time. Although somewhat ham-fisted as a segue, there are parallels that can be drawn between this and the DWP consultation, issued last month, which will force trustees of DC schemes with assets under £100m to consolidate, if they are assessed as not giving good ‘value to members’. In practice, this means having to transition into a Master Trust, our metaphorical ‘shark’ which has been lurking beneath the keel of own-trust schemes in recent years.
The DWP and Regulator’s belief that there is a long tail of these schemes that have languished in the shallows for years, with high charges, sub-optimal oversight and restricted retirement flexibilities, is sound. But there are also many sub-£100m own-trust schemes currently operating with committed boards of trustees, scheme sponsors and professional advisers that can demonstrate excellent value for members: it seems as though they will now have to commit additional resources to continue to justify their existence. Is the alternative worthwhile?
Before DC schemes consider this course that that appears to have been plotted, it’s worth asking if the Master Trusts into which schemes are being encouraged to transition, are themselves moving in uncharted waters. At present there 38 approved Master Trusts, but it’s already widely acknowledged that this is far too many to be commercially viable in the long term. There have already been dropouts and mergers, and the PPI’s latest report on their financial sustainability makes for sobering reading. And if you examine the latest data from Master Trusts’ 2019 accounts you will find some interesting statistics. For example:
- Average member DC account values ranging from £950-£52,000;
- Increases in active membership over the year between 0-45,000; and
- The number of participating employers in schemes ranges between 7-92,000.
A lesser-known risk is the huge lottery for members if a Master Trust’s fund provider goes bust. You could be forgiven for thinking that the Regulator’s tough authorisation process would have made sure that all Master Trusts protect members equally on such a critical point. But no.
Many Master Trusts (and other DC schemes) are structured so that members can get no compensation whatsoever from the Financial Services Compensation Scheme, or only up to £85,000. Clearly this lack of protection is very worrying indeed, but in some cases where the investments are structured differently, members should be 100% protected. This is a minefield for any own-trust scheme consolidating into a Master Trust.
But let’s assume for a moment that you have decided to move. There is an assumption amongst many schemes that they will be automatically piped onboard. Not necessarily - most Master Trusts will assess if your mandate is competitive, failing which you may be turned away. If you want to try and replicate some of the features in your current scheme (e.g. a bespoke default fund or scheme literature), there’s no guarantee that this will be accommodated either. Will the Master Trust cover the fund transition costs you may incur by moving, given that the first question members always ask is – will I be worse off? Once you’re in the net and trusteeship has been outsourced, your ongoing influence may be restricted, although it is possible to operate a scheme with a degree of joint governance and oversight.
Don’t get us wrong. Master Trusts can work very successfully and for many clients and schemes it is the right thing to do. We have been involved in numerous successful transitions of this type which has resulted in improved better retirement support, value for members and overall engagement. But there’s often extensive ‘sea fog’ to navigate through in the process, so you really shouldn’t under-estimate the complexities involved.
In a nutshell, it seems that big isn’t necessarily always beautiful and the playing field is far from level. You need to choose your Master Trust provider very carefully.
So which way is the tide going to take you?