Viewpoint: Master trust consolidation set to drive value for money

The master trust space has seen significant change in recent years, with regulatory requirements from the The Pensions Regulator (TPR) playing a major role in changing the shape of the industry as well as the entities which operate within it.

Prevailing regulatory and cost pressures point to consolidation as an increasingly frequent occurrence that, done thoughtfully, can increase competitiveness and service, and ultimately help deliver better value for scheme members.

Indeed, the number of master trusts in the UK market more than halved when TPR required them to seek regulatory authorisation back in 2019. Two years later, around 35 master trusts remain active. Without a crystal ball it is difficult to predict exactly what is to come next for master trusts.

But with the smaller part of the market struggling to turn a profit and the regulator’s remit to protect pension scheme members, it is possible TPR will ask smaller master trusts to find a new home if they are unable to deliver value for money to members over the long term.

Regulation is also pushing small stand alone trusts to consider their situation, asking them to benchmark their value for members against alternative solutions. Master trusts are a natural alternative and consolidator for these smaller DC schemes.

A Small Market?

In many industries the idea of consolidation resulting in increased competitiveness is counterintuitive. But like five or six large supermarket groups deliver differentiated product lines and variety of consumer choice, so does a consolidated master trust market.

For master trusts, consolidation should deliver a level of competitiveness in the short and the long-term that will create a healthier industry that is able to help provide better outcomes for members.

In the long term, member choice is a clear winner. While there will almost certainly be fewer providers over time, it is also likely that the providers will be more stable and have greater resources.

We believe the outcome of this is better service, more detailed analysis and greater ability to communicate and interact with members in an increasingly personalised way. There is also the possibility that master trusts with greater resources than before are able to differentiate their offerings from one another.

As competitive distinctions between providers develop, so too does the ability for employers to select a service that is best suited to their needs.

Indeed, SEI has been one of the first in the market to undertake consolidation with the purchase of the Atlas master trust. The deal means the combined assets under management (AUM) of the SEI and Atlas master trust total approximately £2bn (€2.4bn).

Critically, the decision to buy the Atlas master trust allows room to bring scale to the business. The 110,000 new members now have access to SEI’s data, resources and expertise, which can provide a more personalised offering, while delivering the stability of a larger provider. In this sense, a smaller market is positive if the providers within it are able to produce similar, scalable benefits, whilst offering diversity of approach.

And there are short-term benefits of widespread consolidation in the industry that feed some of these longer-term trends. Consolidation in this industry will likely be characterised by availability of choice. For those that cannot survive independently, there will likely be the option to select partnerships in a way that enables the alignment of values and culture.

This sort of thoughtful consolidation provides the opportunity for customer-centric thinking, we believe a far better outcome than a scale-at-all-costs approach.

In that vein, bigger is not always better, but as the trend of wider consolidation matures, bigger should represent a better deal for members. Providers operating at a larger scale can generate economies of scale, which ultimately can be passed back to members to make investing in this way better value for money.

Alternatively, if a provider decided not to pass economies of scale savings onto members immediately, members would still stand to benefit in the long run from those savings. Those savings could be reinvested back into the business to make it stronger and better able to generate profit, the fruits of which should eventually be passed back to members.

While it is impossible to know exactly what will come next in the sector, consolidation seems a likelier outcome than any. Yet, consolidation can take many forms, and this market seems ripe for thoughtful, considered consolidation that puts customer outcomes first and helps to deliver value for money, above all else.