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In the run-up to recent market volatility, we surveyed stakeholders of defined benefit (DB) pension schemes on the challenges they are facing and the consolidation options they are considering. In this latest article in our survey series, we’ll explore the topic of DB master trusts in more detail, looking at the benefits and the perceived barriers to entry.

The DB pension industry has been through a significant period of change since our survey closed. We’ve seen unprecedented daily movements in gilt markets, and a consultation on a new funding code has been launched.

As the dust settles, many trustees and sponsoring employers are still trying to understand the impact of these developments on scheme positions, relative to long-term objectives.

In time, these events may well affect the DB consolidation industry. But for now, let’s take a look at what our respondents said when asked about the benefits of DB master trusts.

Source: abrdn DB consolidation survey 2022

The problems facing DB pension schemes include mounting complexity, rising costs, and the increasingly weighty burden of time-consuming work (see the first in our series of survey articles for more on this).

A DB master trust can help provide a solution for smaller DB schemes, where the trustees and sponsoring employers may lack the time and resources required for pension administration.

Sponsoring employers we surveyed were strongly optimistic about the benefits a master trust can bring.

The DB scheme stakeholders we surveyed recently were positive about benefits, such as improvements in governance, cost reductions and greater access to the buyout market, among others. The subset of sponsoring employers we surveyed were even more strongly optimistic about the benefits a master trust can bring.

Perceived barriers

Relative to other forms of consolidation, the DB master trust market is still relatively untapped, with only £13 billion of assets under management . However, it’s clear that the industry could cater better for small schemes. Indeed, at a recent Work and Pensions Committee, outgoing TPR Chief Executive Charles Counsell commented that the average standard of small scheme governance could be improved through consolidation.

So what has prevented the UK DB master trust market from taking off? We asked our survey respondents what they perceive as being the barriers to entry.

Chart 1: How much of a barrier is each of the following factors to entering a DB pensions master trust?

Source: abrdn DB consolidation survey 2022

We believe that more can be done to help scheme trustees and sponsoring employers understand the features of a DB master trust and appreciate that what is perceived as a barrier may not be a barrier at all.

For example, the data cleansing required for entry into a DB master trust may feel like a burden in the short term, but it could set the scheme apart when the time comes to move to full buyout with an insurer.

Knowledge is power

Our survey has also shown that there is probably a low level of knowledge about the benefits of a master trust. While master trust providers can do more to educate about their relative merits, we also note that the gatekeepers to holding conversations with corporate sponsors are often those that stand to lose out the most if a transaction ultimately proceeds. This results in a missed opportunity to increase member benefit security or to spend sponsor resource more efficiently.

While recent encouraging comments from The Pensions Regulator are helpful, we’d welcome firmer guidance on this subject, perhaps along the lines of the “govern or consolidate” initiative within the DC pension space.

We also asked pension stakeholders what sort of reduction in running costs would help overcome the perceived barriers to entry, with 63% requiring a 30% reduction or less.

Chart 2: Roughly what sort of reduction in running costs would help overcome the perceived barriers to entry in a master trust?

Source: abrdn DB consolidation survey 2022
  1.  Source: XPS DB Consolidation market research, April 2022