As many as 10 master trust providers are in talks to exit the industry due to tougher rules coming into place in October, according to one player in the market.
Under the new rules, master trusts will have to hold enough capital to cover 'worst-case scenario' costs.
This would include transferring pension members to another scheme or of winding up, without charging members.
So providers currently have a window of seven months in which some schemes are looking to sell their business or merge with bigger players.
Graham Peacock, managing director of workplace pension provider Salvus, told FTAdviser that between eight and 10 providers are in negotiations with other companies.
He didn't disclosed their names.
Official figures on how many master trusts exist are hard to come by.
But The Pensions Regulator said last year that 87 master trusts were registered with them, meaning around 10 per cent of trusts could cease to exist in their current form.
However, he noted that these schemes "need to do a lot of extensive due diligence in the likelihood of the home that they are going to being authorised".
The Pensions Regulator has already found some master trusts used by workplace pension schemes are choosing to drop out of the market rather than comply with the new authorisation regime.
Two deals were completed last month, with Salvus acquiring Complete, and The People's Pension announcing a merger with Your Workplace Pension.
Another hurdle that providers that wish to exit the market need to face is member charges.
According to the current rules, a bulk transfer without member consent – as in the case of master trust consolidation – must guarantee that members are charged at the same level in the new scheme, as they were in the previous one.
Since 2015, providers have to cap the charges within default funds to 0.75 per cent per year of funds under management.
However, some of the existent master trusts apply lower fees, such as National Employment Savings Trust (Nest) and Now: Pensions, which have an annual management charge (AMC) of 0.3 per cent.
Mr Peacock said: "If you are a master trust that is charging 0.75 per cent, and if you are trying to consolidate a master trust in that is charging 0.5 per cent for example, it wouldn't be legally possible to do, because the cost to members cannot be increased.
"You can discuss [a potential deal] with anybody, but unless the scheme has a mechanism to charge a lower AMC, it can't absorb an existing lower AMC in the market base."
This will be an important limitation for schemes that are looking to consolidate, he concluded.
According to Mike Lacey, partner at Berkshire-based financial adviser firm Bowman Pension Consulting, the marketplace is limited, so consolidation in this space is inevitable.
He said: "While it may initially be painful for members, if the future sustainability of their pension provider can be assured, this has to be a good thing.
"Should a provider consolidate with another, that new provider will receive a lump sum of existing funds, which will contribute rapidly to the bottom line of that new provider.
"The worst thing that could happen, in my opinion, is for weak master trusts to wither on the vine, leaving members with a product that is out of date, and does not perform as expected."
maria.espadinha@ft.com
