The Pensions Regulator is losing sleep over the number of mastertrusts on the market - but the launches keep on coming

“I think if we end up with more than 10 then we’re in trouble.”

Andrew Warwick- Thompson made this comment about mastertrusts to Pensions Insight in late November. Back then, he estimated there were around 70 in the market. Less than two months later, three new mastertrusts launched within the same week.

If Warwick-Thompson, the Pensions Regulator’s executive director for defined contribution, governance and administration, was losing sleep over mastertrusts over the winter, he must be breaking into cold sweats now that spring is here.

Estimates over the true number of mastertrusts differ. While carrying out research for this article, PI was quoted numbers ranging between 25 and 200.

Definitions of ‘mastertrust’ vary, which may be contributing to the confusion: some people would not include trusts that only encompass two or three employers.

We want to see big-scale schemes. That’s why we don’t want to see a proliferation of them

Whatever the true number, most agree that a market containing more than a dozen mastertrusts is inefficient. As Warwick-Thompson puts it: “We want to see big-scale schemes. That’s why we don’t want to see a proliferation of them.”

The spate of mastertrust launches is being driven by the volume of savers being auto-enrolled into pension schemes and the business opportunities that this influx of cash creates.

The Pensions Institute said in a recent report: “Providers and advisers are well aware that auto-enrolment is a one-off opportunity to win sufficient market share to survive in their current form. The stakes are high.”

Not all will survive. The same report predicts a period of hard-line consolidation so that by 2020, five to six monolithic mastertrusts will dominate the market.

Regardless, the launches keep coming, with each provider arguing it has something different to offer the market.

To be fair to the new mastertrusts, established providers, faced with an influx of enquiries from employers, have started to cherry pick the business they take on, leaving some companies scrambling to find a provider. It’s hard to blame the new mastertrusts for seeing a gap in the market and leaping to fill it.


Lighthouse Group, a major independent financial advisory firm, was behind one of the three mastertrusts to launch in the last week of January 2014. Roger Sanders, the company’s managing director of employee benefits explains:

“It became apparent that the major providers, quite rightly, are picking and choosing the business that they want to take on…We could see a capacity crunch for new business.

“We also then discovered that setting up a mastertrust can be done reasonably straightforwardly once you’ve established what you have to do.”

Why wouldn’t employers that are struggling to find a provider opt for Nest (National Employer Savings Trust), which is obliged to take on whatever employers come its way?

“There’s nothing wrong with that except that the site, and the way it works, isn’t as intuitive as it could be,” responds Sanders.

“We’re finding that most employers that we’ve on-boarded with Nest want us to do it for them with delegated authority. So we’ve got a fee structure for doing the assessment, doing all the work, helping them with contribution validations – the whole thing. And there’s no earthly reason why we couldn’t replicate that into an environment where we have more control.”

Put like that, launching a mastertrust sounds like a no-brainer. But if the Pensions Institute is right, many of these mastertrusts will not still be here by 2020.

Sanders stresses that Lighthouse’s mastertrust received an excellent reception from the regulator – but are all new mastertrusts being built to last?

I think there are opportunistic players in the market

Warwick-Thompson is not convinced they are. What makes alarm bells go off in his head when he looks at a new mastertrust?

“Probably looking at the people who are running it and their experience of pension schemes, the extent to which they have capital to back what they’re doing. We see them trying to compete with Legal & General or Nest on price.

“That needs capital behind you. You need to be able to burn cash for a time before you get paid back. I am concerned that the business models of these mastertrusts just aren’t sustainable at the price they are trying to charge.”

Morten Nilsson, chief executive of NOW: Pensions, shares the regulator’s concerns: “I think there are opportunistic players in the market who will withdraw in a fairly short while.”


How then to tackle those opportunists? Nilsson thinks the answer is a tougher regulatory regime. “We’ve been arguing for a while that it’s too easy to set up a mastertrust. There’s no barrier to entry and the regulatory regime is quite light.” What sorts of barriers to entry ought to be put in place?

“Perhaps capital requirements, so they have to have enough money,” says Nilsson. “We would really like to see them with some kind of licensing or authorisation.

“If they are receiving people’s hard-earned money, they should have to have a governance model that is good enough, products that are fit for purpose, a business model that can demonstrate it is sustainable and an administration set-up that is comforting, that they know what they are doing and have member records kept well.”

Others believe the various voluntary frameworks ought to be consolidated and turned into regulation.

Speaking at a Pensions Insight round table on DC, Nita Tinn, director of Independent Trustee Services, said: “I completely agree that barriers to entry is the best way of [regulating], but what they’re instead doing is going down the independent assurance route, which is going to put an enormous financial burden on mastertrusts, over and above the ordinary governance that they’re already paying for.”

The regulator’s looking for voluntary initiatives

Her fellow panellist Darren Philp, head of policy for mastertrust B&CE, agreed. “The regulator’s looking for voluntary initiatives – and ‘voluntary’ in inverted commas because all the mastertrusts are going to have to do this, there is going to be competitive pressure to do it.”

Philp estimates the annual cost of complying with voluntary regulation, including the Institute of Chartered Accountants in England and Wales’ (ICAEW) framework (its final version is due out later this spring), the National Association of Pension Funds’ Pension Quality Mark Ready kitemark, and the Pensions Administrations Standards Authority’s administration standards, could reach £40-50,000.

“Very rarely do you hear a sector, especially a new sector, saying we want a regulator to regulate us properly. You’re hearing that now, massively, from all the mastertrusts,” says Philp.

Richard Butcher, managing director of PTL, which has been appointed as independent trustee to a number of mastertrusts, including those run by Fidelity, Friends Life and Standard Life, is not convinced of the need for stricter capital adequacy requirements.

He points out that companies that are subject to Prudential Regulation Authority regulation are already subject to such requirements. Plus, the cost of launching a mastertrust is enough to put off all but the most committed, Butcher argues.

“At a bare minimum – and we’ve been through this a few times with providers – the entry costs for launching a mastertrust are in the order of £100,000. There’s no guarantee you’ll get that back on low margins… That’s enough to put quite a lot of people off.”

Concerns about too many voluntary frameworks may also be overblown. The regulator has publicly thrown its weight behind the ICAEW’s framework. It approached the ICAEW because of its experience with developing assurance frameworks.

Andrew Penketh, head of the pensions group at accountancy firm Crowe Clark Whitehill was selected to chair the working group because of his understanding of both pensions and assurance.

Penketh says: “The framework is voluntary, but the regulator has expressed its public view that it would expect mastertrusts to adopt it. So there is a very strong steer there.”


Whatever the regulatory situation, the industry view is that most mastertrusts will not survive in the long term. “The ones that will make it are the ones that can actually grab the land first,” predicts Margaret Snowdon, a director at JLT.

“It’ll be a difficult battle, but the big players are the ones that’ll probably end up with the high ground.” The mastertrusts that scale up fast enough will buy the smaller minnows, says Snowdon.

“But it’ll be a difficult fight for some time, because collaboration is one thing, but when people have set up a mastertrust, the last thing they want is to be subsumed into somebody else’s.”

Butcher agrees that in a race for survival, “The scale of the provider is an important first factor. The insurers, I think, are in a good place here because they’ve got existing scale.”

He adds a qualifying note that “scale is an important factor but also I think there might be one or two boutique providers who will prosper because they can offer bells and whistles that perhaps mainstream providers can’t offer”.

Penketh is relatively sanguine on the issue of whether members would be protected in the event of a mastertrust merger.

“At the end of the day, mastertrust trustees are subject to the same degree of law and regulation that any other pension scheme under trust is. I think sometimes that’s a point that is missed – mastertrusts are set up under trust.

I wouldn’t be surprised if we had another half dozen come through

“You’ve heard a lot of people say “They’re not subject to enough regulation” – well they’re regulated in the same way that all other pension schemes are regulated. So there is a framework in place that puts requirements on trustees to act in the best interests of members and ensure those interests are protected.”

Ultimately though, the industry’s major players – most crucially Warwick-Thompson – remain concerned that a large mastertrust industry is being built on sand.

“We haven’t seen the last of the mastertrusts yet,” predicts Snowdon. “I wouldn’t be surprised if we had another half dozen come through.”

“I don’t think all of the current players in the market, let alone all the new arrivals, can prosper,” says Butcher.