Date Posted: November 21st, 2023
Master trusts continue to grow in popularity as improving retirement outcomes for employees remains a key priority
WTW’s 2023 Defined Contribution Pension and Savings survey not only reveals evidence of continued demand for master trusts but also highlights some of the key factors which make the move towards master trusts increasingly attractive for many.
Proportion of employers using master trusts has risen again
The proportion of employers using a master trust has increased significantly in the last 10 years – 6% of FTSE350 employers were using a master trust in 2014; this has increased to 28% in 2023. Unsurprisingly most of this growth has come at the expense of own trust schemes (utilisation of own-trusts fell from 41% to 26% over the same period), but also through lower utilisation of contract-based schemes (which fell from 54% to 46% over the same period). The survey suggests this trend will continue.
Evidence of continuing demand for master trusts: increased consolidation
WTW’s survey reveals that over 40% of trust-based schemes are considering moving to a master trust in the next two years. This should come as no surprise given the UK government’s policy intention which encourages consolidation. The Department for Work and Pension (DWP)’s new requirements for assessing value says it expects many pension schemes to conclude that better value for members can be achieved by transferring to an arrangement with more scale and resources, and therefore to wind-up. Even contract-based schemes are not immune from the search for better value – nearly one in five employers with a contract-based scheme are considering moving to a master trust in the next two years, with a similar number considering a move to a new provider.
The downward pressure on fees continues
The last decade has seen downward pressure on fees, as providers strive to remain competitive. Master trusts now represents the lowest average fees, compared to contract-based plans which showed the highest average. Despite the fee constraints, master trusts also continue to lead the way on incorporating environmental, social and governance (ESG) considerations within the default investment strategy.
There are a number of reasons why master trusts are appealing to employers and employees
Employers are expecting to focus on reducing their governance burden (28%) as well as reducing costs (15%) over the next two years. This goes some way to explain why the popularity of master trusts is expected to continue. Master trusts are also well-known for their rigorous governance, innovative propositions and use of digital technology. Enhancing employee experience (79%) was the top objective for employers’ pension provision over the next two years.
Complexity and increased expectations will only mean trustees of own trust schemes need even more time, effort and money provide better value for members than can be obtained in a good quality master trust to stay on the right side of the Pensions Regulator. This is unlikely to continue to be palatable to most employers and increasingly challenging for trustees.
Improving retirement outcomes for employees remains a key priority
Nearly two-thirds of employers in the survey said improving retirement outcomes is a key priority. Over the decade, we have seen only a moderate movement in typical contribution rates for employers in the survey, so it appears that employers are looking to improve outcomes by other means (e.g. increased investment efficiency and reduced costs). Helping employees to make better choices both through the focus on financial wellbeing and retirement support are also aligned with this motivation, to improve retirement outcomes. Master trusts are ideally placed to help employers as they can offer innovative communications and tools as well as in-scheme income drawdown.
However, one in four employers do not have a drawdown offering for members. With the DWP now suggesting a requirement be placed on trustees to offer a decumulation service that will provide support at the point of access, this is a potential gap to be addressed.
Due to their increasing scale and the competitive market in which they operate in, master trusts also have the ability and need to innovate rapidly and provide enhancements in future as part of the package. For example, here at LifeSight our recent developments include new investment pathways for income drawdown, enhancements to the ever-popular LifeSight App, and enhancing the ESG credentials of our investments. Members also now have access to a carbon footprint tool which shows the environmental impact of how their money is invested.
About the survey
For further information on the survey and to explore other trends revealed relating to the UK DC market, please access the full report here:
If you want to find out more and discuss how LifeSight can help your organisation please contact David Mitchell.
