Can I let you in on a secret? There’s been a revolution. No, not the prorogation of parliament. A pensions revolution!
I’m talking about the rise of the master trust pension.
What is a master trust pension scheme?
A master trust pension scheme is a multi-employer occupational pension scheme.
Unlike traditional employer defined contribution (DC) schemes, master trusts pool together anywhere from a handful to thousands of employers into a DC pension scheme.
There’s a good chance that you’re a member of such a scheme. From a little over two million members ten years ago, as of the start of 2019 there are 14 million master trust members.
What brought about this huge increase? For one thing, auto-enrolment. The vast majority of workers now automatically save into a pension. Master trusts have been the main recipient for this deluge of savings.
Another reason, frankly, is that master trusts are pretty darn good.
For those in the big master trust schemes, the charges are low, governance is strong, and savings are placed into low-cost baskets of globally diversified passive tracker funds.
Why should you care?
Even us diehard DIY investors have to concede that master trusts are simple and efficient.
In fact, in many respects they are the cheapest and easiest way to efficiently save towards retirement. There are several reasons for this.
Firstly, the trust structure means that a board of trustees oversee the running and investments of the scheme. They have a duty to invest in members’ best financial interests. Further, Investment Governance Committees (ICGs) continually assess whether members are getting value for money.
Secondly, by pooling large numbers of employers and savers together, master trusts can access huge economies of scale. The days of small employers being unable to offer affordable pensions for their employees are gone.
Thirdly, some schemes invest in assets that are difficult for DIY investors to access such as infrastructure, private equity, and property.
Finally there is a strong regulatory regime for master trusts. All new master trusts must be authorised by the Pensions Regulator. At the time of writing 27 schemes are authorised, with others awaiting sign off.
Big boys keeping fees low
The big boys in the market are NEST, People’s Pension, and NOW: Pensions. Between them they have ten million members and over £10 billion in assets under management.
Each of these offers a carefully constructed globally diversified default fund, predominantly using passive investing strategies. So costs are low, too.
NEST has an AMC of 0.3%, plus a 1.8% charge on new contributions. People’s Pension charges a sliding scale of 0.5% to 0.2% and Now: Pensions charges 0.3% plus a £1.50 admin fee per month.1
Across the whole master trust universe, the average AMC is around 0.4% to 0.5%. These charges are far below the 0.75% fees cap on auto-enrolment qualifying default funds, and give even the cheapest SIPPs a run for their money.
Appraising performance
One of the big issues with old, legacy occupational schemes is a lack of transparency on both fees and performance.
Happily, master trusts must operate in a highly transparent fashion due to new regulations.
Fees are clearly written on the doors and investment performance is – relative to the byzantine world of pensions – quite easy to check.
The best source for comparing performance is CAPA DATA, which sets out and compares performance for 95% of the market. As a data geek, it is a treasure trove of information.
Risk/return for several master trust and GPP defaults – younger saver, 30 years from retirement five-year annualised to Q1 2019, gross.
Source: Corporate Adviser, Performance Matters: Master Trust and GPP Default Report June 2019.
As you can see from the chart, performance has been variable, although most of the defaults have clustered around the 8% to 10% return mark.
- Standard Life has been a continual lower-volatility, lower-return performer courtesy of its relatively low (c.45-50%) allocation to equities.
- Now: Pensions has been criticised for its poor performance (principally arising from currency hedging).))
- NEST has generally outperformed many of its peers at lower volatility, though its 5% allocation to cash for young investors has been controversial.
These returns are reasonably favourable when compared to that Monevator favourite, Vanguard’s family of LifeStrategy funds. The LifeStrategy 60 and 80 have achieved five-year annualised returns of 8.4% and 9.6% respectively at the time of writing.2
The key takeaway though is that not all master trusts are built the same. It’s worth considering whether the default option is right for you, and whether an alternative fund is more suitable for your attitude towards risk, temperament, and investment needs.
ESG options
I believe another feather in the cap for master trusts are the Environmental, Social, and Governance (ESG) options. (Not everyone necessarily agrees!)
Most master trusts are publicly committed to considering ESG investments and set out their approach to considering financially material ESG factors in their Statement of Investment Principles.
It’s not just lip service. New DWP rules require that from 1 October 2019 pension schemes must have a policy with respect to financially material ESG considerations. Schemes must have a policy on the extent to which they consider the views of members and beneficiaries, including ethical views, and also the social and environmental impact.
Most master trusts have an ethical fund option. Master trusts are also taking a public stance towards ESG investing.
NEST has recently announced it is divesting from tobacco companies in all funds. Likewise, The People’s Pension has begun to reduce allocations to fossil fuels in its funds.
Many default master trust pensions already adopt some form of ESG screening. The majority of remaining defaults are considering introducing ESG screening over the next two years.
The performance of the two leading ESG providers, NEST and The People’s Pension, is also highly encouraging. NEST’s Ethical Growth fund notched a five-year 68% return (compared to 56% for its standard fund). Similarly, The People’s Pension’s Ethical fund returned 72% over five years (compared to 50% in its default fund).3
Furthermore, some master trusts are not run for profit. For example, The People’s Pension is owned by B&CE, a not-for-profit originally focused on providing financial services for those in the construction industry and now aiming to provide simple affordable financial services to everyone. NEST is a quasi-government entity set up to offer pensions for everyone, especially those on low-incomes and historically regarded as being uneconomical to traditional pension providers.
For Islamic investors, several master trusts offer Sharia-compliant funds. Note these tend to be 100% equity-based funds.
Who can have a master trust pension?
If you are one of the millions in a master trust, then most schemes allow you to transfer your other occupational DC pots into your master trust scheme.
Options are unfortunately more limited for the self-employed. Most master trusts are not open to the self-employed. However, NEST is open to the self-employed (due to their public service obligation).
Transferring and consolidating pots has become much easier recently. Consolidating your pension pots is often a good ‘spring clean’ (though it’s worth checking the ‘buts’). Most schemes no longer charge for transfers out. Those that do are capped at 1%.
Given that the vast majority of master trusts are relatively new concerns, most don’t levy transfer out fees either.
Almost all the master trust schemes employ an electronic system provided by a firm called Origo. Origo is a FinTech firm, owned by several financial institutions, set up to improve efficiencies in the financial services space.
Transfers are now mostly processed electronically (rather than paper!) through the Origo system. The result is that transfer times have come crashing down. Origo transfers take on average only nine days, although there’s still variability between providers.
Flexibility
It’s worth knowing not all master trusts offer the complete pension flexibilities introduced in 2015. For example, only around half of the master trusts offer income drawdown without the need to transfer out of the default fund.
This means savers may have to transfer out to access their pension flexibly.
Generally speaking, master trusts are working on adding more flexibility and improving savers’ transition from accumulation to deaccumulation in line with FCA guidance on retirement pathways.
However, I’m not aware of any schemes looking into advised drawdown – that is providers guiding savers towards a ‘safe withdrawal rate’.4
Noble-prize winning economist William Sharpe described the safe withdrawal rate as “the nastiest hardest problem in finance.” Good luck to us mere mortals in figuring that one out!
The default funds are typically ‘lifestyled’, so that as savers approach retirement age their equity allocations are reduced. Exactly how this lifestyling works varies from scheme to scheme.
Lifestyling is based on the principle that savers annuitise their portfolio on retirement. Given that most pension savers now opt for drawdown over an annuity, the jury is out on whether lifestyling requires an overhaul.
Incidentally, I’m aware that for one scheme some savers choose to keep pushing their retirement age out to avoid being lifestyled, which means manually changing their ‘retirement age’ to prevent their pension being moved out of equities!
Master trust pensions: A summary
- Master trust pension schemes offer a cheap, efficient, and easy way to save for retirement. The master trust structure has a lot of strong corporate governance built-in and allows for low-cost investing.
- We’ve had almost seven years of auto-enrolment and performance data for master trusts. And the returns have been good.
- The regulatory framework and trust-based nature of master trusts provide protections for savers. Unlike the ‘dark ol’ days’ the schemes are transparent and upfront. Fees and charges aren’t hidden behind a wall of jargon.
- Master trusts also take their ESG responsibilities seriously and by law are required to consider and set them out publicly. Many defaults already incorporate some level of ESG screening.
- Transferring and consolidating pots is much easier these days. For those in a master trust already, you’ll likely be able to easily consolidate your other occupational DC pension pots. However, things are trickier for the self-employed – as far as I’m aware NEST is the only provider (though the pressure is on to improve access to pensions for the self-employed).
- The default funds are lifestyled as savers approach retirement. Many master trusts allow flexible access to pension pots, though some require savers to transfer out to get the full range of pension flexibilities.
- Now: Pensions’ fee has been subject to some controversy. See: https://www.moneymarketing.co.uk/now-pensions-fee-controversy-escalates/. [↩]
- Source: Trustnet [↩]
- Source: The Good Guide to Pensions [↩]
- I have seen that some providers are working towards a non-advised retirement account – so good things seem to be on the horizon for savers. [↩]
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Any chance, TDM, that you could reactivate your Young FI Guy blog for, say, a month, so that I could look again at some of the linked posts I’d bookmarked? I, and I dare say others, would be very grateful.
We’re hoping to migrate YFG’s more Monevator-relevant content thisasaways over the next few months, FWIW, with updates where appropriate. If there are particular articles that are sorely missed, maybe TDM could prioritize them, where we all think that’s for the best. 🙂
Is a master trust scheme only available as an occupational scheme? So basically if you’re in one you’re in it, you can’t choose one? And, do they allow self select investment options?
@Vanguardfan – that’s right it’s an occupational scheme and your employer chooses it. If you’re in one you can transfer into it or consolidate your pots. If you’re self-employed you can open a pension with NEST. Most schemes offer self-select options those these aren’t like a SIPP where you can pick specific stocks, ETFs and funds. To give an example, outside the defaults NEST offers a higher risk fund (more tilted towards equities and emerging markets), an ethical fund, a sharia compliant fund (which is 100pc equities) and a low risk fund. The other big schemes like People’s and NOW have similar options.
@dearieme – YFG is no more, as TI says we’re hoping to give some of the articles a spring clean and a new home.
Esg regulation will only harm social mobility, if the masses are barred from sin stock. Sin stock becomes relatively cheaper – ok for some
Complete pension freedom would be being able to nominate your own pension provider to your employer or enrol in their own without losing out on any company contributions. Australia has this system with superannuation and it works smoothly.
Finding lost pension accounts would be good functionality to have as well, something Australia also has. This will be important with auto-enrolment creating lots of small pension accounts for people who move between jobs regularly.
@dearieme if you’re sharp about it, Google https://youngfiguy.com/ and select the cached option and view as text you can get the guts of many articles. Offer is only good for about two weeks though
@Fremantle – that’s right. Lots of lessons have been learnt from Australia who are a few decades ahead of us on this. However, we have seemingly dropped the ball on pot consolidation. The Aussies found themselves with the same problem we will face soon – hundreds of thousands of lost pots. They worked out a partial solution though they are still recovering from the burden of tons of tiny pots. We’ve yet to come up with something and ‘pot follows member’ has been killed off by the Government. In effect, we’ve lost the ideal time to deal with it (a big problem was the restrictions put on NEST when it first launched). Some folks hope that the Pensions Dashboard will help. I’ll confess that I’m less sanguine – I don’t think it will get people engaged with pensions.
@Matthew – ESG and ethical investing are two separate, though interlinked, issues (which I’ve unhelpfully bundled together here). I’m personally skeptical on whether secondary market divestment really has the impact that people think it does. Leaving that aside, the principle here is that if the government is forcing people’s money to be invested it’s only right that that money is invested in a way that is consistent with the general sentiment of society. I think that’s right. Most people would be greatly unhappy if their money was being invested into companies that made cluster bombs or landmines. Where it goes from there? – well that’s up to the scheme to clearly explain and set out.
@ermine – thank you!
@The Details Man
In Australia, superannuation providers typically make finding your lost accounts straightforward, although no one is forced to do it. Providers are required to report super account balances to the tax office.
There are positives to both, I prefer the nudge/opt out of the UK system, and the choice of provider of the Australian system. UK SIPP platforms are much more preferable to Australia’s retail super provider’s platforms which tend to force you to invest in generic high growth/growth/conservative type expensive active funds or limited passive funds or pay higher fees to only access a limited selection of ETFs with even more limits on how you invest. If you are resident and have significant assets in your super, a self-managed super fund can get you access to a wider range of assets. UK ISAs fit a neat niche that Australia simply doesn’t have.
Of course the Australian system has screwed up the principle of tax-free on the way in and during accumulation, taxed on the way out, with reduced tax on the way in and during accumulation, tax free on the way out.
I would trace my nascent obsession with personal finance back to the Australian tax system where I discovered I could claim to be an ‘Australian for Tax Purposes’ by presenting a valid library card and thereby get a *huge* tax rebate for the work I’d done on a 12-month working holiday visa. I think you could do everything online using an application called ‘SuperTax’ which back then was pretty revolutionary for my luddite brain.
@ermine: “select the cached option” – woz means? Safari simply whinges that it can’t open the page. It doesn’t offer an option that I can see.
Wayback machine similarly declines to help.
@Freemantle – thanks for the colour, interesting stuff – for me anyway! (are you an Aussie?)
I understand the Australians use a unique identifier so that pots can be tracked to individuals. Unfortunately, we have nothing near as sophisticated here yet (despite lobbying).
To readers, ‘retail’ funds in the Australian context mean typically nasty high charge, actively managed funds – the opposite from the cheap passive defaults offered by UK master trusts. An international comparison by a research body showed that UK DC comes out favourably against lots of other countries.
On the tax point, I’m not au fair with all the tax rules in Oz (I understand its quite complicated). The Oz system is Exempt Taxed Taxed (ETT) so contributions are generally tax reliefed but returns and income are taxed (subject to some adjustments). Whereas UK pensions are EET (with a limit on the initial E and complications on the T). ISAs by way of comparison are TEE. Which provides a nice opposite to pensions.
@details – we could say the general sentiment of society is represented by market cap, we could say that any deviation from indexing that may result in costs should require consent
We could argue that the little guy feels more guilty than they ought to for what tiny share of sin stock they have, when big fish have no qualms
If something is too immoral, it ought to be illegal, so whatever is legal should be ok in an ideal world which admittedly it isnt – i dont think cluster bombs are legal? – i think something like fighter jets are more moral than guns because they resolve conflicts more quickly and are unlikely to fall into terrorist hands. Things like tobacco and gambling could be said to be personal choice
You could argue that any fees above minimum are immoral, because they detract from what can be invested in the economy – perhaps tobacco dividends can go into food production, etc
@dearieme you have to put YFG’s URL into the search bar of Google thusly For me the top results starts with Contact. Underneath there is a URL, and at the very end of the URL line is a small green down arrow. Click that and a small box offers you Cached. Click that. The resulting page looks empty with a bar at the top saying Full version | Text-only | View-source. Take text-only. You can now read a gonzo unformatted version of the page. All the links go to the original. You can copy a link or take your bookmark link and paste that into Google and find the page in the stream of stuff. Then do Cached and Text version.
You’re going to have to streetfight it each page at a time. I don’t do Apple, but I see no reason why this shouldn’t work on Safari. If you are doing it on a phone rather than desktop then all bets are off because I haven’t the faintest idea what happens.
@ermine. Thanks for taking the trouble. I’ll give it a go later.
@DM
Yes, I’m Australian.
Retail simply means provided by a bank or other financial institution, for profit and open to all, some with more or less active/passive options.
The other types are industry, corporate/employer, public sector and self-managed. There is a new option called MySuper, which is meant to be bare bones and low cost, aimed at smaller accounts. I’ve no experience of MySuper, a development since I left.
Industry were original run by organisations like trade unions, but many are open to all, and are non-profit. They tend to be lower fee, but can be limited to offering expensive active options and limited passive ones.
Corporate/employer are similar to company pensions, public sector are for government organisations (often with defined benefit options) and self-managed is similar to SIPP, but with greater options for non-listed investments.
Australian superannuation is TTE, not ETT. But it is very, very complicated.
https://en.wikipedia.org/wiki/Taxation_of_superannuation_in_Australia
The biggest danger to UK pension schemes is the temptation for the government to mess with taxation treatment. Australia has suffered with this, the amount of wealth accumulated in superannuation makes Australia the richest (in terms of capital/assets) country per capita (median, second on average) in the world.
https://www.visualcapitalist.com/countries-wealth-per-capita/
This is simply too much money for the government to ignore, unfortunately.
Thanks Freemantle – I read that Wikipedia article and it made my head hurt! Glad I don’t have to deal with that (makes the UK system look like a doddle in comparison).
Also, thanks for the correction on tax treatment. I have absolutely no idea why I wrote what I did! All my source docs (from the OECD and World Bank) had the right info, I just typed it out wrong! This is why I have a rule against writing comments from my phone (which I’m continuing to break as I’m away…)
Finally, I agree with you on the temptation point. Having seen how the sausages are made I’m inclined to be distrusting of the Government. I’m also sympathetic to the arguments that private pensions have become a pseudo semi-privatisation of S2P. That said, I know TA doesn’t agree on this, so there’s much room for differences in opinion.
Are any of the master trust pension schemes covered by the FSCS?
Couldn’t tracing old pension pots via a pension dashboard be as simple as using your NI number.
Caveat, I have had two NI numbers. At age 23 and old bloke from Payroll came into the office and said. “We are having problems trying to pay your NI for the past 3 years – it keeps getting rejected”. Transpires I was given somebody else’s NI number on those blue and red plastic cards that got sent out (I think)
Numerous interviews later I was given a new NI number and my contributions transferred into the new account (even though one year I had 75 weekly credits against my NI number?? Still can’t figure that out)
I have never thought about the problems it left behind with S2P and maybe some old pots . I have a letter into the NISP at the moment to find out any contracted out dates.
The provider we use at work isn’t on the chart so not sure if it is complete?