The rise of the DC Master Trust – and why it could be a good option for your employees
Master Trusts account for a significant part of the workplace pensions market, with the assets of more than 18 million UK savers invested in them.
In the past few years we’ve seen a remarkable growth in the demand for DC Master Trusts. But what’s all the fuss about? But where did the Master Trust come from and what has led to their recent rise in popularity?
A brief history of the Master Trust
A Master Trust is a multi-employer occupational scheme where each employer has its own division within the master arrangement. They’ve become a popular pensions solution in recent years, but they’re not a new concept.
Since the 1970s, Master Trusts have shifted from being a relatively niche option serving the needs of smaller employers to being increasingly seen as the DC vehicle of choice for employers.
1970s, 80s & 90s - The emergence of the Master Trust
Early Master Trusts were mainly used by smaller employers and executives attracted to the fact that they allowed for much higher funding rates than standard pension arrangements.
2006 - Master Trusts seem consigned to the pension history books
Pension tax simplification legislation simplified scheme funding, bringing all pension arrangements under one funding regime. The new rules spelt the end for Master Trusts as their USP evaporated.
2012 - The Master Trust is resurrected
In response to automatic enrolment requirements, Marks & Spencer went in search for a large employer solution that suited its needs better than a Group Personal Pension (GPP). Working with M&S, we revisited the benefits of a multi-employer trust based scheme, and the pension providers responded with a new, more attractive version of the Master Trust, with L&G becoming M&S’s provider of choice – the Master Trust is resurrected.
2012-2018 - The rise of the Master Trust
Many more providers enter the market, in response to employer demand, quickly accounting for 35% of the workplace pensions market.
2018-2019 - The year of authorisation
Master Trusts had to apply to The Pensions Regulator for authorisation and demonstrate they met the strict new criteria. This tough authorisation process led to a large number of Master Trusts exiting the market, reducing the number of providers from 90 to 37.
2020 – 2021: The hype around Master Trust continues to grow
The regulatory focus on Master Trusts continues with the ongoing supervisory regime and the drive to consolidate schemes to improve member outcomes. The market is flooded with employers wanting to make the move, with demand overtaking supply, and Master Trust providers becoming selective about who they let in. Rivalry continues between the largest Master Trusts as they compete for scale – this continues to drive further innovation in the market and lead to a continued downward pressure on pricing.
The future of Master Trust
By 2026, Master Trusts’ share of the workplace pensions market is expected to grow from £80bn today to £400bn. Meanwhile, consolidation of the DC market is expected to reduce the number of Master Trusts from 37 to around 15-20 very large Master Trusts.
What’s all the fuss about?
The popularity of Master Trusts is due to the attractiveness of fully outsourcing DC delivery but, at the same time, retaining some of the attractive features of occupational pension schemes. Coupled with economies of scale and the downward pressure on pricing, it’s easy to see why they have appeal.
In partnership with Hymans Robertson
We're one of the longest established independent consulting and actuarial firms in the UK