The secondary master trust market is emerging, some advisers say. What might be driving employers to change provider, where are the obstacles to switching and are the trustees conflicted? 

 

Master trusts, the trust-based answer to contract-based providers, often highlight that they come with more governance and go through a rigorous authorisation procedure by the Pensions Regulator, combining low cost and a focus on member outcomes.  

 

Nonetheless, there is speculation that a secondary market is on the cusp of development as the first movers among employers compare their current master trust with other offerings in the market to see if there is better value to be had. 

 

In theory, it does not need to be the employer driving a change, however, as the trustees of master trusts have to assess value for members and see if their trust is still the best place for them. This could put them on the spot given the glaring conflict of interest should they conclude that a competitor offers better value. 

 

A case such as this would be an extreme and unlikely scenario, however, suggests Gerald Wellesley, a client director at trustee firm Punter Southall Governance Services, who sits on several master trust boards. 

 

The market is relatively transparent in part thanks to consultant selection processes, he says. 

 

“I would hope that any growing exodus would be as a result of known issues that trustees would be trying to address,” he says. “It’s tough to imagine that trustees would be in a situation where they would recommend members moving elsewhere – if known such major issues were not being addressed, they would need to be spelled out in the chair’s statement,” he argues. 

  

Wellesley says it is not the trustees’ role to advise members where they should go. “Just focus on providing the best possible ongoing governance,” he says. 

  

Employers – particularly early movers – are starting to review the services and charges of their master trusts. Andrew Cheseldine, a professional trustee at Capital Cranfield, believes there can be many reasons, ranging from below-par service to poor relative investment performance, or simply change in the employer or employee demographic, perhaps driven by recent Covid-19 lockdowns. 

 

This might even increase in future. “The DWP value for money consultation is very specific about the need for more proactive consideration by employers in standalone DC schemes and some master trusts,” he says.   

 

The Department for Work and Pensions, together with the Pensions Regulator and Financial Conduct Authority, is trying to shift the focus on value for money over cost alone, but this is in the early stages, with a consultation just launched on Monday. 

 

    

Within master trusts, there might be “difficult conversations about value for specific member demographics”, adds Cheseldine, for example, where many of the pots are worth £100-£500 - meaning they are above the de minimis charging level of £100. In that case, “should you consider transferring them somewhere that has no such charge before their pot is eroded to £100?” he says. 

 

 

Aside from the value proposition, Faye Brady, a senior DC consultant at Hymans Robertson, points out that some employers are looking around because they are approaching the end of their initial commitment period with the incumbent master trust. 

 

However, a review does not necessarily result in a change of provider. Individual terms do not make switching easier in some cases – for example, contracts can stipulate that deferred members stay behind when the employer swaps provider, which could make some employers’ negotiating position less favourable; or there could be a requirement to pay back transition costs borne by the master trust if an employer leaves before the end of their commitment period.   

 

Transition costs generally are a sticking point, Brady notes. “There is a general expectation on the receiving master trust to pick this up, as they would for any other new scheme entering their trust. But it may not be commercially viable for this to continue given the current competitiveness we are seeing in ongoing charges,” she says. 

 

The trustees also need to sign off that it is in the members’ best interest to move to an alternative arrangement, which is currently a highly subjective assessment.  

 

“More clarity and at minimum, more consistency, of assessments may be provided with the upcoming value for money framework release which is currently under consultation,” says Brady.  

 

While she does not expect that it will be common for schemes to switch provider regularly, she advises employers to consider it at least every five years. Hymans also encourages scheme sponsors to set up governance committees that push the provider for development of services and propositions “and, at a minimum, assess where their provider sits relative to its peers once a year”. 

 

Where an employer finds that its DC master trust has been swallowed as the market consolidates, this “should always act as a catalyst to review the appropriateness of the new provider”, recommends Brady. 

 

 

Anna Copestake, a partner at Arc Pensions Law, believes it is no coincidence the secondary market is showing signs of emergence now.   

 

“A high inflationary environment tends to focus minds on both costs and value. Employers reassess their employee-related expenses and whether better value can be achieved elsewhere,” she observes. 

  

Pressures on DC arrangements have been growing, as a complex system requiring individuals to make life-changing decisions has combined with a challenging investment environment.  

 

"Helping DC members achieve good retirements is both increasingly important and tough. People inevitably look to the maturing master trust market for answers,” says Copestake.  

 

“Employers might increase their expectations from their providers and start to shop around,” she adds, noting that some financial advisers and benefit advisers are raising this with employers. 

 

While it is normally the customers voting with their feet when it comes to changing provider, the trustees do also have a role in the decision, she argues. 

 

“Comparing yourself with other authorised master trusts can be uncomfortable. Authorisation doesn’t mean equality, it’s a baseline. Propositions vary and determining what’s best for individual members in a rapidly developing market can be hard," she says. 

 

A master trust will have conflicting objectives. It would probably not want to lose business but would at the same time seek to avoid reputational damage in the handling of the situation.  

“All parties will have a role in the process in some shape or form, creating a heady mix of interests,” she says. 

 

Have you seen employers changing their master trust?