Time for master trusts to take a fresh look at retirement income?

I’m really pleased this blog is getting a lot of reads; I hope some of them are from people who fund , manage and govern our master trusts – our next great pension story!

We now have primary legislation in place which allow Royal Mail to press ahead with its ambitious plan to offer a wage in retirement from a Defined Contribution savings plan. In effect, the RMCPP (collective pension plan) will offer scheme pensions based on the amount in the pot, not a guarantee issued by trustees and backed up the employer. This is radical and delivers CDC in its most holistic imaginable form, it is in practice a whole of life alternative to a DB pension that grants postal workers a market driven wage for life.

It’s unusual for the proto-type of a new product to deliver so ambitiously, it is the opposite of the “minimum viable product”, RMCPP is the maximum viable product within a range of options available under the CDC legislation now enacted.

We could look back at Royal Mail’s decision to adopt and persevere as smashing a way through the ice not just for its 145,000 staff but for millions of DC savers whose craft could follow the icebreaker.

I currently see no compelling reason for employers to follow Royal Mail

But this will require others to innovate and while there was a political imperative for Royal Mail (avoiding a potentially existential pension strike),  no such compelling driver exists with other employers. I see no compelling reason for any large employer to want to take on CDC at this stage of the de-risking cycle. It would not be approved by shareholders, nor appreciated by staff and I will be most surprised that any employer will upgrade an established DC plan to pay scheme pensions. There is no commercial imperative for employers to want to become pension providers again. It will only happen where another union follows the CWU in demanding CDC or else. Is this likely to happen right now- I suspect not – the timing of Royal Mail’s decision making was fortunate.

I see three compelling reasons for master trusts to pay scheme pensions using CDC legislation and regulation

There are three compelling reasons why commercial master trusts should consider adopting aspects of the CDC legislation and secondary regulations and converting to collectives.

  1. Most master trusts are pretty well mono-funds in accumulation. Nest report self-selectors at less than 1% of savers, NOW doesn’t even offer member choice. Whether by design or in practice, most master trusts (as all workplace schemes) are seeing such concentration of saving into the default that they might as well have one collective fund than millions of individual pots.
  2. Master trusts want a way to hold on to member’s money to and through retirement. People are auto-enrolled at 22, when they reach 55 they are as far from death as they are from 22. The economics of master trusts show they make their money at the back not the front end of a saver’s time in their scheme. Extending the period of membership from 55 to death makes a master trust radically more valuable to its owners.
  3. Investment pathways do not look attractive to master trusts. Investment pathways are the FCA’s solution for individual savers and they involve each saver taking a tricky decision whether to keep investing, start drawing down an income, swapping pot for annuity or cashing out. None of these options really work for master trusts for whom the concept of scheme pension, paid for the remaining lifetime of a member is still the cultural norm. Master trusts aspire to be pension schemes, while GPPs aspire to offer pension freedom.

Master trusts could and should aspire to provide a scheme paid pension as their post retirement default.

Master trusts in accumulation are a success story. They are providing good value for member’s money and are increasingly managing the risks of changing climactic conditions, responding to the needs of a country needing patient capital investors and improving the corporate governance of organizations into which they invest.

But master trusts have not got a “to and through retirement plan”. For many, this is not a problem, the demographics of auto-enrolment driven workplace pensions, principally Nest, NOW, Peoples and Smart but also a large number of well run smaller plans, are insufficiently mature to make retirement options a major issue. Other master trusts , that depend on the consolidation of more mature schemes (typically insurance and consultancy owned), may have much more mature member profiles. Schemes such as Tesco and Vodafone that folded their DC plans into L&G and WTW’s master trusts, brought with them the saving of many employees over many years. Many of these participating employers are now looking to master trusts to provide a means for their employees to afford to retire. So far, we have not seen any consensus how this should be done.

A wonderful opportunity for Master Trusts.

There is some confusion as to whether master trusts can convert to collective money purchase schemes without further primary legislation. I have it from the DWP that they can and am grateful for this clarification from an architect of its legislation

Section 47 of the Act is intended to allow us to extend to master trusts and other multi-employer arrangements that are not currently in the scope of the Act without requiring further legislation.

I have pasted in the text of the provision, but what it allows us to do is use regulations to

(a)  Extend the provisions to cover pension schemes used, or intended to be used, by two or more employers some or all of which are not connected with each other,

(b)  Set out matters such as authorisation etc. that would be different for such schemes,

(c)  Make provision corresponding or similar to provision made by or under Part 1 of the Pension Schemes Act 2017, which was the act that set out authorisation for master trusts – thereby allowing us to provide for a hybrid CDC/master trust authorisation framework,

(d)  And modify the CDC primary and make consequential modifications or amendments of any other enactment to give effect to (a) above.

This tells us that master trusts could be authorised to be both DC and CDC, perhaps offering two versions to employers or simply allowing members to move from individual accumulation to collective decumulation by shifting from DC to CDC when it suited them.

The big win would be for master trusts to continue to accumulate as they do now – individually, but be able to default members into the CDC section at normal retirement age or such a point as the individual member wanted to switch from “saving to spending” their pot.

“Evolution not revolution” – many Master Trusts could easily convert all or in part to CDC

Starting up a CDC with a big DC scheme as a feeder is a lot easier than starting one from scratch. Nest , L&G , Peoples and Lifesight all have schemes with tens of billions of assets under management.

Master trusts are increasingly looking the biggest game in town in terms of retirement saving.

CDC may look risky for individual employers and their trustees, but is nowhere near as formidable if you are Willis Towers Watson, Aon or Mercer – all of whom are the owners of large DC master trusts.

And what is the alternative for those reaching retirement? Either retirement investment pathways (RIP) , or a transfer to a SIPP? If the former, then Trustees are going to have to be comfortable that their members are managing their drawdowns sensibly and they have precious little leverage over that; if the later, then the Trustees lose their owners any right to the future income of members from as early as the member’s 55th birthday.

Master Trusts can and should see CDC as an opportunity

CDC is a practical extension of the mono-fund culture that prevails in master trust. It presents a commercially attractive alternative to retirement investment pathways to sponsors and it allows trustees to provide members with scheme pensions that last as long as the members do.

Set against these advantages to master trusts, the opportunities to single employers to convert to CDC don’t look that compelling. Indeed the greatest opportunity for some of the largest DC single employer DC plans , may well be to become a multi-employer master trust and put pension provision on a commercial footing. CDC challenges not just master trusts but single employer DC trusts – to provide to and through retirement solutions to members.

If we look 10 years ahead and assess where the CDC schemes will be, I predict that all CDC schemes will be multi-employer, including the whole of life solution offered by Royal Mail. CDC represents an extension of the Government’s plan to help the private pension sector rationalize and simplify itself.

Footnote; the fundamental advantages of CDC underpin this argument

The argument from WTW that CDC provides 40% better returns than DB and 70% better returns than DC can be challenged by actuaries and other pension experts for the assumptions WTW use. But I have seen no fundamental challenge to the principle that an open collective scheme has advantages over a closed one.

While it is possible to see many scenarios where bad management could lead to the ruination of a CDC scheme, I have not seen any argument for bad management. I have seen arguments why CDC schemes should be well managed and why they should stay open and I am inclined to side with those who are ambitious to do the right thing, not the wrong thing.

Cynics may say that pensions will always go wrong and that CDC will be strangled by regulation. But if we start out with an ambition to succeed, why should we be planning on failure?


About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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2 Responses to Time for master trusts to take a fresh look at retirement income?

  1. Adrian Boulding says:

    I am a fan of CDC for decumulation and believe that it offers retirees that want regular pension income an attractive alternative to an annuity – surrendering some covenant and certainty for additional flexibility and the prospect of better returns gained through collectivism. But this will be for “mature” master trusts, that have either arisen from the conversion of other mature schemes to master trust or have successfully attracted mature customers and their funds through a consolidation process. CDC is less likely to be a model for high turnover AE master trusts.

  2. There will be a CDC breakout room and CDC blog in the new Pension playpen when it launches in April…


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