Articles - Unintended consequences of Master Trust consolidation


Regulatory changes are reshaping the master trust market and the pressure to continue delivering value for money to customers while turning a profit has been building for some time. As a result, consolidation of the market has seemed somewhat inevitable. The defining questions are whether we are at the beginning of a wave of consolidation, and if so how will this change the market in the years to come?

 By Steve Charlton, Defined Contribution and Solutions Managing Director, Institutional Group EMEA and Asia, SEI

 Before The Pensions Regulator (TPR) launched its authorisation process for master trusts in 2019 there were 90 providers in the market. The process, which aimed to raise standards and strengthen systems and processes in the Master Trust space, has left just 35 . There is an expectation that the number of participants in the industry will continue to reduce as the master trusts that are unable to demonstrate the ability to deliver value for members or comply with reporting standards, partner with other schemes. As the number of providers continues to decrease, the size and scale of those that remain will grow and competitiveness and differentiation should increase as well. But this growth will not be without challenge.

 A Capacity Squeeze?
 The defined contribution (DC) market is a vast and growing market. Post-auto enrolment, every employer has to have a DC plan to enroll their members in and therefore increasingly needs sophisticated technology and personnel to service their needs properly. With consolidation as a driving trend on the DC landscape and as employers and members begin to experience the benefits of these enlarged schemes’ size and scale, it is likely that the rate of consolidation will increase further. Consolidation will beget more consolidation and ultimately the industry will comprise fewer, larger trusts.

 A period of consistent consolidation breeds the potential for a significant capacity squeeze in the industry - a capacity squeeze that will see the industry experiencing growth without the people or systems required to service such a growing member base.

 If consolidation ramps up, which we expect it will, it is likely that this already growing market could see a large increase in the number of schemes that need to be rehomed. Smaller schemes that are unable to demonstrate value for members may either be stymied by the government’s responsibility to savers or unable to comply with regulatory reporting requirements, potentially putting them on the market seeking a suitable provider. The number of schemes going to market in a relatively short time could be significant and we can realistically expect that there will be sharp peaks of activity across the industry.

 By the same token, consolidation will result in a sizable decrease in the number of total providers that make the grade as new homes for those smaller schemes. Should both happen at once, we could well experience a serious capacity issue in which the market has too few providers able to deal with all of the new business that needs to be processed and onboarded.

 Business Planning
 Not all businesses face the same risk of experiencing a potential capacity squeeze, but many providers that exist post-consolidation will be forced to make tough decisions, such as whether to invest in more people or upgrade their systems, and when to integrate these in order to help deal with the volume of new business that could be headed their way. Those who are able to make decisions and set a course now to enable their future growth can reap the benefit.

 Decisions around in-sourcing versus out-sourcing will need to be made too. Third-party resources that are able to scale up and down with the resource requirements of providers, as their activity peaks and troughs with the market, will be well placed to respond to a changing market. These facilities are valuable as they help to avoid the fixed costs and commitments of in-house resources and may well prove a more attractive option to growing schemes.

 The defined benefit (DB) sector has just come through a major retendering exercise off the back of the CMA investigation into investment consultants and fiduciary managers. That experience has taught us that not only can there be a squeeze on providers and their service and onboarding teams but also on the consultants running the processes. The pension industry is a massively intermediated industry, with DC and DB schemes leaning on the expertise and in-depth knowledge that the consultants bring to selection processes. During the DB retendering exercise earlier this year, consultants were postponing non-regulatory driven selection processes to after the CMA deadline as they were struggling to find resources. The capacity squeeze will reach all corners of the supply chain.

 In an ideal world, the growing DC member-base would be evenly distributed to ensure that employers and members received the best overall outcomes, but without a mechanism in place to ensure this, capacity squeezes may be inevitable. Yet, it is no reason to prevent consolidation that ultimately aims to better the industry. Successful consolidations are likely to demonstrate which providers have looked ahead and prepared for the opportunity to grow and thrive in changing market conditions.

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