Auto-enrolment, freedom and choice and tightening regulation have helped make it an eventful few years for master trusts. Mark Dunne spoke to David Snowdon about the £450m SEI Master Trust in its 10th anniversary year and finds out why he believes the UK is set to have fewer master trusts.
“If you are an employee benefit consultancy or a life company and you do not have a history of running trust-based arrangements then you probably have some challenges ahead.”
David Snowdon, SEI Master Trust
How have the first 10 years been for SEI Master Trust?
Quite interesting. Since 2007 we have seen a movement towards contract-based schemes and then a movement to where we are today. It is now widely recognised that if you are running a workplace pension scheme that a master trust is the main solution. Within the UK DC we had £450m under management at the end of Q2 for 25 participating employers and about 17,000 members.
What impact has auto-enrolment had on the pensions industry?
We set up the master trust to bring the best of what we do at SEI into the defined contribution (DC) arena. When you look at the uptake of master trusts, which was very much driven within the auto-enrolment arena, you had what was finally known as NEST come out of that master trust structure.
So going from this position where we were one of a few operating a master trust in the UK, after NEST there was a big surge of auto-enrolment vehicles being created by people who could see that there was potentially an opportunity for that mass market, off-the-shelf type of product. It depends on where you get the numbers from and how they are broken down, but if there are 70 master trusts out there, about half of those are auto-enrolment vehicles. From our perspective the uptake of auto-enrolment was positive. For one, a number of our schemes use auto-enrolment because it is their main scheme. They automatically enrol because that is what they have to do.
What it has been quite helpful for is that it made an awful lot of noise about master trusts, especially to the benefit consultants that hadn’t considered this as a vehicle for their clients before, let alone as a potential source of revenue for themselves. They started looking at it and said: “There is a bigger market here than we have been looking at.” To a certain extent, at some point along the way, probably around 2012 or 2013, the penny dropped in that we were moving to a contract base because they seemed a good idea.
We could pass the responsibility, and in some cases the cost, onto the member, and that was the route that was taken. If you want to pass the responsibility away from the employer that is fine, but it is far better to pass it to someone who has oversight. So we have seen a trend of moving away, particularly by the larger schemes that have clearly been looking for an alternative to running their own single trust schemes because of increasing regulation. They obviously realised that there is a better solution out there. The feedback we get from clients is that we are able to create the scheme that they would run if they had the resources, the time and perhaps the advantage of the intellectual capital that we have.
So regulation has been good for you?
You have got to remember that at the time automatic-enrolment came in there was deliberate light touch regulation. Part of that was because of a fear of a capacity crunch. The government said everyone who employs more than a person is going to have to go through automatic-enrolment and there was a fear of NEST not being able to cope. So we have seen a massive increase in master trusts. There are a lot out there that we may not have heard about a number of years ago, and possibly may not hear of them a few years hence. That increase was effectively facilitated by light-touch regulation. It served a purpose in that we are now getting towards the end of the automatic enrolment process and most employers have gone through okay. So the capacity crunch did not hit. There has been an increased focus on regulation. The Pension Schemes Act 2017 is already in place, setting an authorisation regime for all master trusts which is going to kick in next year. There are requirements on the fitness of trustees. Again, if you have been running a trustee board for 10 years then you can imagine that we are quite well prepared for that. If you are an employee benefit consultancy or a life company and you do not have a history of running trust based arrangements then you probably have some challenges ahead. There are a lot of people in the industry at the moment who are probably wondering if the numbers are going to add up and if it makes sense to continue. I suspect that in October next year, when authorisation kicks in, we will not have 70 master trusts. The year after that we will probably see a reducing number, so regulation is driving change.
What impact has the charge cap made?
It has not made any difference. What I would say is that within the markets we operate in, a larger scheme would not expect a charge to be above 75 basis points for a default strategy. There is a consultation going on at the moment to see if that should fall further. If it does, and clearly there is a move towards scale generally within the master trust environment, then there might be some challenges there. I’m in two minds about reducing this further. Clearly there needs to be control over charges to make sure that members are getting value for money, but there is always the concern over the extent to which you will limit investment creativity. When we started the master trust we wanted to take our best ideas from defined benefit (DB) and fiduciary management and bring them into the DC arena. We worked on a blank canvass. We worked from the perspective of if you have no restrictions what would you do? How would you do it? The more restrictions put in place, this drive to the bottom and focus purely on price, can be counter-productive. That said, it depends on what happens and where it ends up.
