What could be driving the accelerating trend towards Master Trusts? 

To answer these questions, we first need to understand how these trends may develop as the future of retirement provision.

In the past, occupational retirement plans in many countries including the UK, Ireland, the Netherlands and Switzerland were generally either set up as insurance contracts or as company-specific self-administered plans.

These self-administered plans need to be set up under a trust to ensure they are tax-efficient and run in the best interest of the plan members. Trust fiduciaries must act in the best interest of plan beneficiaries and follow plan rules, legislation and regulations when making decisions and administering the plan.

Master Trusts are trust-based plans that include members from multiple unrelated employers. A trust-based approach provides greater flexibility to make changes in line with the plan members’ interests as new circumstances arise.

Master Trusts (or their equivalents) such as APFs in the Netherlands and collective foundations in Switzerland, have rapidly increased in recent years. Master Trusts are expected to reach the equivalent of £461 billion in assets by 2029, according to Broadridge research.  In the UK, The Pensions Regulator estimates that Master Trusts are ‘set to account for over half of all future workplace pension arrangements’.

So, what is driving the move to Master Trusts?

These three drivers are moving companies and fiduciaries to consolidated solutions such as Master Trusts. But is this a good thing for plan members? The answer is overwhelmingly “yes”:

Greater comfort around regulatory compliance and risk mitigation

Master Trusts give greater comfort that the plan will be administered to a high standard, that investment oversight is sound, and that operational risks are addressed. In part, this is because a specialist provider runs a Master Trust as a core element of its operations, rather than trying to manage a plan alongside its core business. Meanwhile, trustees provide their services as professionals rather than volunteers. There is also the security of the regulatory standards to which Master Trusts are held. In many countries, these standards are more rigorous than smaller employer plans. 

Lower fees through scale economies

Intense competition between Master Trusts and consolidation within this sector have fuelled further innovation and reduction in costs, while investment management charges are generally regressive. They represent a lower percentage of assets where the overall value of assets is higher, all other things equal.  

More opportunity through technology

Technology enables greater flexibility and choice for plan members through more sophisticated modelling tools, the ability to actively manage investments and an experience for members that foster engagement. Larger plans allow for better technology at a more manageable cost.  

Defined benefit (DB) plans can be harder to transition, unless a separate section is available under the Master Trust that avoids cross-subsidies between participating companies’ sections. This can be the case in countries including the UK and Netherlands, but not generally in Switzerland or Ireland.

Sectionalised arrangements can involve ongoing relationships with legacy employers, so many of the scale economy benefits associated with DC Master Trusts can still be achieved. Without the ability to administer member benefits in different sections, a Master Trust would need to have a carefully designed entry price mechanism to avoid diluting the security of existing member benefits. This requires bespoke regulation, as seen in the UK.

Master Trusts are a welcome addition to the plan management toolkit and intense competition and consolidation within them have fuelled innovation and even lower charges, contributing to potential for better member outcomes.   

Master Trusts have the potential to:

• Remove inefficiencies 
• Reduce costs 
• Mitigate risks  
• Save on management time (versus managing a plan internally) 

Meanwhile, the economies of scale mean that for a lower cost, plan members can potentially benefit from: 

• Greater investment choice 
• Better online account management  
• Improved modelling tools with a consumer-grade experience 

Potential downsides

In some Master Trusts, schemes can only invest in the founding institution’s proprietary funds, concentrating risk. Indeed, where a single group of related companies provides all of the services for a Master Trust’s scheme, the risk of conflict of interest can be a potential concern. Also, as trustees are typically appointed by the pension provider, there can be potentially less freedom in investment choice compared to a typical contract-based scheme. Care is needed when selecting a Master Trust to make sure any such issues are identified and allowed for in the comparison of providers.