How will the shift towards DC master trusts develop?
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Babcock International is moving its £1.06bn defined contribution section to a master trust, but are companies continuing to transfer DC schemes in droves, or has the pace of change slowed down somewhat?
The London-based engineering group launched its new DC arrangement with the Aon Master Trust last year. The contributions of about 18,500 active DC members have been flowing to this since 1 October.
However, the trustees have agreed to also moving existing DC pots to Aon after the company asked them to consider doing so, with the scheme having about 21,000 deferred memberships, in addition to the 18,500 active members. The proposed transfer to Aon is expected to take place between mid-January and the end of February 2025. Until now, the Babcock DC section has been providing funds on the platform of Aviva, who is also the pensions administrator.
There are several drivers for schemes being moved to DC master trusts. Alison Bostock, a professional trustee at Zedra Governance, lists the policy and regulatory push, “ever increasing” DC governance, and more detailed and costly value for money requirements for small schemes.
She says that “frankly it’s hard to do DC as well as a master trust does without a big budget” for investments and at-retirement solutions, and notes that DC sections of hybrid schemes are sometimes ‘rehomed’ when the DB section is bought out.
“We are still seeing a steady flow to DC master trust, but it will of course tail off gradually over time,” Bostock observes.
However, where a sponsor and trustee have agreed to continue running a DB section for surplus, “then one potential use of surplus is to pay the sponsor contributions to the DC section of the scheme”, she points out, with some DC schemes originally set up with that purpose in mind.
Will contract-based schemes migrate to master trusts?
Shabna Islam, head of DC provider relations, says in terms of number of employers transferring DC schemes to master trusts, this appears to be the same as last year, driven by increased governance requirements.
However, she adds that there are now fewer own-trust schemes left to transfer and therefore thinks transfers to DC master trust will slow down.
A change proposed by the government so that contract-based DC policies could be moved in bulk without individual member consent could drive further business to master trusts, however.
“We do expect, should bulk transfers of contract-based arrangements be put in place, more contract-based arrangements considering a move to a master trust,” she says.
Master trusts and providers will be under pressure to attract assets, as well as merging, if the government pushes ahead with minimum size requirements for their default funds, having floated a size of between £25bn and £50bn that may need to be reached by 2030. A consultation on the matter is open until 16 January.
Hugo Gravell, an investment consultant at Barnett Waddingham, said the trend for schemes to consolidate into master trusts “certainly continues”, and stressed that the company decides over the arrangement for future contributions, while trustees of the own-trust scheme need to decide what to do with existing pots.
There are reasons besides tightening regulation for choosing a master trust.
“We are starting to see master trusts consider more sophisticated investment strategies,” Gravell says. He adds that “potentially more significant today is the access to continued support for members to-and-through into retirement”.
It is not practicable for the vast majority of single-employer schemes to offer such a solution, he argues, and consequently, their DC members are usually forced into the retail space at retirement.
But “consolidating is certainly not right for everyone”, Gravell says – employers lose some control over how to invest and how to implement specific beliefs, such as on sustainability.
A, somewhat less common, reason for not using a master trust is when a company looking to consolidate its DC scheme finds it has been excluded from a master trust’s investment portfolio. “Those companies may not be happy to use that master trust,” he remarks.
For Babcock, the decision to consolidate its already large DC scheme comes as the company also closed its £980m defined benefit section to future accrual from 30 September last year. Of 9,800 DB members, about 159 were still active last March and were defaulted into the Citrus Pension Plan if they did not make another choice. The accrued benefits of 148 who joined that DB master trust were transferred last year, with liabilities estimated at about £56m.
