Bosses reviewing their workplace pension offerings will increasingly be opting for master trusts as their main defined contribution (DC) scheme, new research shows.
LifeSight, Willis Tower Watson’s master trust, polled 190 organisations and found close to three quarters of these (71 per cent) have reviewed or are planning to review their DC pension delivery vehicle in the next two years.
As part of this process, the share of businesses expecting to choose a master trust is set to more than double over the next three years - from 12 to 26 per cent.
LifeSight found the growth was partly driven by schemes moving away from single employer trusts and group personal pension (GPP) contract-based pension schemes. These are set to decrease from 34 to 23 per cent and 50 to 47 per cent, respectively.
This trend has also been observed by Aviva, which saw auto-enrolment inquiries made by small and medium-sized businesses (SME) increase 80 per cent since 2017.
Many SMEs in the market have had their schemes for a number of years, leading to a secondary market where businesses are looking to change their auto-enrolment pension provider.
According to David Bird, head of proposition development at LifeSight, with the master trust market having experienced rapid growth since its inception, it is no surprise that the survey shows more organisations are moving towards these schemes.
However, LifeSight is not anticipating more consolidation in the market.
Mr Bird said: "This is good news for prospective employers and members, as those master trusts left standing will be able to achieve the scale necessary to improve their offering to members."
The drivers behind companies’ decisions to review their workplace pensions were found to be a desire to enhance communication and engagement (68 per cent), and to improve outcomes (60 per cent).
Fewer than a third (31 per cent) of respondents said integrating pensions into a wider financial well-being programme was a driver for them.
Conversely, costs involved with the change were the main barrier to changing an organisation’s DC pensions vehicle for almost half (43 per cent) of organisations.
Further barriers included the internal resources required (43 per cent) and lack of clarity around the benefits (41 per cent), or insufficient benefits from making a change.
Mr Bird said: "The desire for better member communication and outcomes is something that our research encouragingly reveals is a key motivating factor behind organisations’ decision to review their DC pension delivery vehicle.
"For those organisations looking to switch to a master trust, focus should be on the strength and quality of governance and management of those trusts under consideration."
Mike Lacey, partner at Berkshire-based financial adviser firm Bowman Pension Consulting, said companies might be opting for master trusts because they were "moving away from single employer DC schemes which are increasingly coming under the spotlight".
He said: "There have also been issues with some master trusts whose administrative capacity has fallen over. The better capitalised providers will benefit from this flight to quality.
"I regard most workplace pension schemes as notably 'sticky' – there does need to be a real reason for an employer to change provider, even at the three year point. There would have to be real issues for an employer to move and I wonder if most of the movement has either taken place, or been set in motion.
"Regardless, if a master trust is well governed and properly resourced, then a move from a calamitous provider would likely be appropriate. Bulk transfer of existing scheme assets would allow the new provider to break even and make a profit, which means that the new scheme will probably be better supported in the future."
maria.espadinha@ft.com
