Review of pension master trusts reveals a transformed and competitive market
Robin Hames, June 21, 2012
At its heart, a master trust is a multi-employer, trust-based scheme. It has trustees to protect members’ interests like a trust-based scheme, but it is not the responsibility of the employer to run the scheme, like Group Personal Pension (GPP) schemes.
Until recently the master trust market had been relatively dormant. It's fair to say that GPPs had taken the lion's share of attention, and product development.
Indeed much of the traditional providers' energy and focus had been given to the 'next generation' of benefits after GPP: Group SIPPs, Corporate Wraps, online pensions, workplace ISAs, total reward statements and flexible benefits.
However, auto-enrolment and the development of the NEST have been the catalyst for a newly competitive master trust market to emerge.
The Personal Accounts Delivery Authority (PADA) was charged with developing a low-cost pension scheme that would meet the needs of a target market new to pension saving. PADA was collaborative in its review, engaging with consultancies, employers and employees to help shape its proposition.
The end result was effectively a master trust-style scheme. PADA's achievements in such a short space of time have been impressive: it has engaged with an ignored demographic, challenged assumptions around lifestyling and default funds and made genuine strides in considering our use of language.
Now, though, NEST finds itself with a proposition that is being challenged by new providers. Since the end of 2011 we have seen more and more providers set up their own master trusts, without the restrictions imposed on NEST - the contribution cap and transfer restriction.
Accordingly, as part of our due diligence programme, we carried out our bespoke provider research programme, BlueBook, on this nascent market engaging with the seven main providers. We believe our research to be the most comprehensive review of this market to date.
Two types of master trust have launched in the last six months. The first is those looking to capture the entire workforce, such as Legal & General and Standard Life. Both of these providers have appointed an independent trustee, but the schemes are administered by the provider and funds are also invested with the provider. These propositions are not necessarily looking to compete with NEST, but with established occupational schemes and GPPs.
The second group are those who will, like NEST, accept employers of all sizes regardless of employee profile: NOW:Pensions and The People's Pension. It should be stated that these are commercial operations without a public service mandate, so are under no obligation to transact business with an employer.
These new propositions both have pedigree: NOW through its work in Denmark, while the People's Pension has successfully administered the B&CE stakeholder scheme for the last decade or so. Both are designed as simple pension schemes with a small fund range.
These providers and NEST have different charging structures in place for essentially the same type of employee. NEST has a 0.3% annual management charge (AMC) with a 1.8% contribution charge. The People's Pension has a single charge of a 0.5% AMC while NOW:Pensions has a 0.3% AMC and an administration charge per member that varies between £3.60 and £18 a year.
Establishing which type of charging structure will most benefit employees will require detailed analysis by employers, looking at their whole workforce and any existing pension schemes that are in place.
Ignoring the contribution cap and the ban on transfers in, our BlueBook research highlights an interesting challenge for all the master trust providers: the degree to which their proposition exceeds the boundary of being purely a product. At one extreme, providers are potentially offering employers a complete auto-enrolment proposition, with software being developed to interact with HR and payroll systems to identify and categorise employees as well as determine the necessary payments and trigger the correct communications. However, although some have this capability, it will only be made available to clients on a selective basis.
At the other end of the spectrum, others, including NEST, are not developing this added utility. With payroll and employee benefits consultancies developing their own 'middleware' to serve this purpose, this narrower proposition is not necessarily unviable but does potentially leave providers who have chosen this route exposed when operating in a competitive environment.
So the master trust, the 'awkward' pension scheme seated between the stoic trust-based scheme and exciting GPP, looks to have found a place in the pensions arena. NEST's arrival is a welcome addition and has undoubtedly reinvigorated the market; however the key to its success will be its ability to further develop its proposition in the context of a competitive environment.
Robin Hames is head of technical, marketing and research at Bluefin Corporate Consulting