master trusts - itm · the survey responses covered 1.3 million members and over 100,000 employers...

Master TrustsSURVEY RESULTS 2018

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Introduction

During Spring 2018 ITM conducted a survey of the UK Master Trust market. This report presents the results of the survey, and includes ITM commentary on them.

The UK Master Trust market is maturing towards becoming one of the primary structures for the future of DC pension provision.

The landscape has developed significantly, with the final phase ofthe auto enrolment staging process leading to significant volumes of data and work for employers and employees. Alongside this, the Pension Scheme Act 2017 contained important operational andgovernance changes for Master Trusts which are being worked through.

The survey responses covered 1.3 million members and over 100,000employers – a significant proportion of the market, although the largestMaster Trust did not respond.

Master Trusts have in 5 years or so, become the most significant vehicle for Auto Enrolment and continue to increase in number, as single employer trust-based schemes and some Group Personal Pension schemes, convert to the Master Trust model.

At the same time, Master Trusts face their own specific challenges withthe new Authorisation regime increasing operational standards andgovernance requirements, as well as raising the prospect that some Trusts may fall short of these measures.

We invited 57 Master Trusts to complete the Survey, and are pleased to share the results of our findings.57

1.3 million members

100,000 employers

ITM LIMITED / UK MASTER TRUST SURVEY 2018 / 02 /

ITM LIMITED / UK MASTER TRUST SURVEY 2018 / 04 / / 03 / UK MASTER TRUST SURVEY 2018 / ITM LIMITED

Trusts have just 6 months from October 2018 to apply for authorisation from the Regulator in order to continue operating. The key themes of the authorisation framework cover:

Whilst some will be confident of immediate authorisation, for others it will presentsignificant challenges both initially and on an ongoing basis.

We therefore felt a survey was timely, and focused the research on bothviews of current challenges as well as on how the market will develop.

The Survey focused on the operational elements of Master Trusts rather than investment management which has been the focus of other recent research.

October 2018 >>> November 2018 >>> December 2018 >>> January 2019 >>> February 2019 >>> March 2019

CONTINUITY STRATEGY

FIT AND PROPER PERSONS

FINANCIAL SUSTAINABILITY

FUNDING STIPULATIONS

EFFECTIVE OPERATIONAL SYSTEMS AND

PROCESSES

Q2 Q3

NO 8%

Is your Trust open for Auto enrolment?

Q2. As we would expect, the significant majority of Master Trusts are open for Auto Enrolment.

If yes, do you accept all sizes of employers?

Q3. Despite market commentary when AutoEnrolment was launched that Schemes and Providerswould be selective on accepting new business, mostMaster Trusts have elected to take all types and sizesof employer. This is significant as the survey wasconducted whilst smaller employers were completingstaging. Later in the survey we look at the implicationsfor Master Trusts of smaller-employer business.

NO 8%

YES 92%

YES 92%

YES 10%

NO 90%

Q6 Do you see this changing in the near future?

Q6. This finding indicates thatthe vast majority are comfortablewith their governance structure. Itwould be surprising if Trusts wentinto Authorisation with plans tochange a fundamental part oftheir operational model.

Q4 Does your Trustee board include a professional independent Trustee?

Q4. An unsurprising result, over recent years the growing trend for Master Trusts to appoint a Professional Trustee means their absence would now be viewed as a governance shortcoming. Master Trusts typically use the leading independent firms in this area. This provides a clear distinction between the Trust operator (effectively a commercial enterprise) and the Trustee Board which has members’ interests front and central in their duties.

YES 100%

Q5 Do you use a TPA or administer your trust internally?

Q5. This is indicative of most Master Trust operators. Where outsourcing administration to professional third-party administrators might otherwise be a majority position, the Master Trust market contains a number of pension providers (who tend to retain administration responsibility) and also some players with pensions administration as a core business capability. There is also the issue of cost management - a fully integrated operation can offer greater cost and operational control and integration with other functions.


70% Internally

30% TPA

Q7 What proportion of your business originates through the following?

Q7. This demonstrates a broad set of channels for new business. This may reflect either the spreadof Master Trusts surveyed (each of whom may have a more limited number of channels) or that most Trusts seek to source business from a range of channels. Throughout the staging cycle, large and mid-size employers have taken advice on compliance and provider selection, whereas smaller employers have worked with payroll providers and made a direct provider selection. What is clear is that the advised channel represents more than 50% of new business. This is important when considering the secondary market (later in the report).

INDEPENDENT FINANCIAL ADVISOR

25%

14%

19% 13% 10% 10% 10% 19% 0%19%

OTHER

4%

33%EMPLOYEE BENEFIT CONSULTANTS

PAYROLL FIRMS

Q8 What do you see as the top 3 operational challenges to your business?

Q8. A broad range of answers to the operational challenges. There is a clear focus on the implications of volume and the acceptance of data from third parties. Our experience of the market highlights a complex operational landscape with Master Trusts reliant on multiple data sources and robust systems and controls to ensure (a) accurate data management, (b) timely investment of contributions and (c) regulatory reporting. All of these concerns are demonstrated in these findings.

We know from our clients that the volume of data being received, combined with the need to make systems intuitive for relatively inexperienced users, presents a major challenge in this area. The need for reliable reporting across such a range of employers increases the likelihood of errors slipping through. The relationship and interactions with employers also have a major bearing on the successful operation of a Master Trust – establishing efficient acceptance and rejection processes is critical (this links also to the system challenges).

VOLUME OF DEMAND placed by

small employers

QUALITY OF DATA

provided by employers

SCALABILITY of systems

INTERNAL resources

ABILITY TO reconcile & process

contributions

SERVICE PROVIDED BY administrator

partners

AUTOMATION of process

OTHER


BUSINESS ADVISERS

12%

DIRECT (EMPLOYERS)

12%

20%

Q9 How confident are you in the quality of data in your system(s)? Q10 What aspect of the Pension Schemes Bill will impact

your business most? (select all that apply, 1 being the biggest impact and 5 being smallest)


Q9. We are slightly surprised by the confidence shown in answering this question. Whilst the amount of individual data held by Master Trusts is not huge (although gross volumes are), whether data is accurate will depend on quality of data at source.

We know from our experience that some Master Trusts accept payroll data in good faith – however many individuals and employers providing this data do not have a full understanding of the impact of contribution data (as an example) on members’ pensions. Validation processes and the screening and filtering of data on receipt therefore need to be near-perfect to avoid integrity issues which will in turn create downstream challenges.

Depending upon the model selected to undertake assessment, communications and contribution calculations, we expected Master Trusts to demonstrate more varied confidence in data.

confident

10% don’t know but have

an audit plan70% very confident

Q10. The Pensions Scheme Bill (when the Survey was conducted) now passed as an Act, introduced Authorisation, the key themes of which formed the answers to be rated. The broad spread of answers reflects the range of organisations operating Master Trusts and their scale. While the Pension Regulator will view all key subjects as critical to approval, Governance and Sustainability will certainly receive close attention. The principal purpose of Authorisation is to prevent market or provider failure, and to ensure that members’ benefits are protected. Having a strong governance framework coupled with a plan that underpins sustainability will be key.

REGULATORY CAPITAL

FIT AND PROPER ASSESSMENT

SUSTAINABILITY PLAN

GOVERNANCE

OTHER

40% 10% 10% 40%

30% 10% 60%

20% 20%20% 40%

20% 30% 10% 40%

30% 10% 60%

1 2 3 4 5

BIGGEST SMALLEST

Q11 Q12What would you like to see from the current review of Auto Enrolment?

The overwhelming response to this questionmay arise as it has the most positive impact on thecommercial model of Master Trusts. Less cynically, itcould also reflect the generally held view that the levelof contributions currently mandated under AE is too lowto produce sustainable retirement incomes. A higherproportion of responses for an extension to include the self-employed might have been expected, given that this sector represents an under-saving population and an area of focus by the Government under the recent AE consultation.

Are you supportive of a move to simplify the Auto Enrolment charging basis?

Q12. A quite revealing response. Most regard a move to a single basis points (“bps”) charge as clear and fair to all members. At present, the Master Trust market contains a myriad of charges from single bps charging with no employer or employee fee, through to set-up fees, monthly member fees, contribution charges, and annual employer fees, most with additional bps charges. Each model impacts on the member, dependent on personal contributions and level of savings. Charging structures significantly impact on the revenue and profitability of a business. We suspect that Master Trusts will form a view having assessed the impacts of any simplification on their own business profitability.

YES

60%

Q13 If yes, how?

50% AMC + recurring Employer Fee

AMC only maintained at 0.75%

50%

Q14How much consolidation of Master Trusts do you expect in the market by the end of 2018

Q14. The findings are largely consistent with currentmarket commentary, although it is interesting that thesector itself shares the view. With 90% of respondentsexpecting at least 10% and 20% expecting morethan 25% to exit the market through consolidation,the sector is heading for a surge of activity andpotential upheaval. The reasons for consolidation linkto the findings in Question 11, although commercialconsiderations will also feature highly.

10%70%

20%

Less than 10%

of active trusts10-25% of

active Trusts

>25% of

active trusts


Extensions to self employedSimplifications of earnings eligibilityRemoval of band earningsIncrease to statutory minimum contributions

NO

40%

10%

20%

10%

60%

Q15Do you have plans to acquire/merge an existing Master Trust?

Q15. Interesting that some 60% of respondents do not see themselves as consolidators. Consolidation requires a specific skill set and for some would be seen as a distraction from building business organically. Master Trusts face risks in “acquiring” other Trusts, notably in quality of data and associated impact on migration, varying pricing models across the sector, and the ability to retain employers once a Trust has been consolidated. We expect the Regulator to show a keen interest in this area as activity develops.

No

60% 30%

10%

Yes, in the next 1-2 years

Yes, in the next 6 months

Q16 What impact do you think Pension Dashboard will most likely have on your business?

Q16. We are surprised that Pension Dashboard is not viewed in a more positive light. Whilst we agree it may create additional costs in the form of conforming to new data sharing standards, opening systems to the pension finder service and potentially cleaning data, we believe that a number of significant benefits will flow to large volume providers in the Master Trust market.

Additional costs

90%

Opportunity to consolidate other funds

Threat to lose existing assets

System upgrade / change

30% 50%

Q17Where do you see the major growth coming from in the next 2-5 years?

Q17. We assume the “increasing contributions” response reflects the upcoming 2019 increase to total contributions of 8% of earnings. We are encouraged by the optimism for secondary market activity (i.e. the movement of existing schemes selected, most likely, at the time of AE staging) to new providers. Although ‘the market’ is only 5 years or so old, we have seen first-hand extensive improvement and innovation in both product and employer interaction and we note from our work that many employers are looking for simpler and highly automated provider interaction. The focus on consolidation of member ‘pots’ is also noted, although seems to contradict the responses on the Pension Dashboard earlier in the survey.


Concerns about data quality

50%

Don’t know / No impact

10%

60%

New

companies

Consolidation of m

ember pots

SecondaryAuto Enrolm

ent

Secondary market

Self employed

Increased contributions

Investment returns

0

10

20

30

40

50

60

70%

www.itmlimited.com

ITM is the market leading, independent specialist provider of data, systems and consultancy services.

ITM consultants are all experienced pension administration system and data specialists, able to provide advice and guidance to Master Trust operators and Trustees on how to identify, manage and correct all system, process and benefit data issues. ITM consultants have extensive experience of:

// Master Trust administration and operational processes

// Strategic Master Trust administration and operational review

// Bespoke administration systems build and implementation management

// Data risk auditing, transformation and transition

// Large scale legacy data and benefit calculation projects

Pensions administration

Data analysis and reporting

Auto enrolment

Member and client access

ITM offers financial services professionals a range of solutions to enable efficient and accurate administration.

ITM provides a range of software solutions:

Further information / media contacts:

Matt Dodds – DirectorITM Limited, 2nd Floor, Minster House, 42 Mincing Lane, London, EC3R 7AE

t / 0207 648 9990m / 07737 857 540e / [email protected]

Duncan Howorth – Executive ChairmanITM Limited, 2nd Floor, Minster House, 42 Mincing Lane, London, EC3R 7AE

t / 0207 648 9990m / 07920 294 664

master trusts - itm · the survey responses covered 1.3 million members and over 100,000 employers...

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