COVID-19 – an accelerant or inhibitor for a changing DC landscape?
18 May 2020
Back in January I penned a short blog on the outlook for Master Trusts and DC consolidation. It goes without saying that the world was a different place then and I know for sure that I’d have laughed at the notion of home-schooling whilst also working... roll-on a few months and I’m definitely not laughing about home-schooling, but we’re ok and fortunate to be safe and well.
Thinking back to that outlook and expectations, the current pandemic clearly wasn’t on the radar at that time and it’s worth pondering what it now means for the shifting DC landscape and the journey to consolidation that we’re all accustomed to.
Consolidation of Single Employer Trust
The future of DC delivery is a familiar dialogue for us all - the march of single employer trusts to the fully outsourced Master Trust model is already a fairly well trodden path and we’ve seen much activity following the introduction of the Master Trust Authorisation regime. And not only at the smaller, poorly governed end which TPR is keen to clean up – we can see that the reach is far wider.
The slowdown in this activity over recent weeks certainly comes as no surprise; employers and Trustees are dealing with a multitude of other challenges and critical issues which will be the immediate priorities and focus. Nevertheless, activity is continuing and it’s clear that the market is very much open for business - providers are keen to secure future pipeline and agree implementation plans in advance of the pent up demand which we’ll see later this year.
The slowdown is temporary and the march to Master Trust will resume after we’ve all had time to catch our breath and adjust to our new normal. And when it does resume, I believe that it will do so with vigour as a direct consequence of the pandemic and the financial strain that many businesses face. Businesses will be looking to reduce overheads wherever possible and pension scheme operational expenses may be an area where these savings can be had – particularly if it’s for the sake of tinkering with pension contribution rates. I expect busy times ahead so those thinking about doing DC differently should press ahead where possible.
Consolidation of Master Trusts
And when it comes to the Master Trusts themselves and market consolidation, in what seems like a blink of an eye we’ve seen the number of Master Trusts reduce substantially - we currently have 32 commercial authorised Master Trusts, down from a starting position of around 90. Further market consolidation has always been expected (and needed) and my view still stands that there will be c15 major players with substantial scale by the time we leave the decade.
We all know it’s a scale game, with modest margins, and it’s clear that some Master Trusts will struggle in an environment which is even more challenging now. Commercial positions will be impacted by the substantial falls that we’ve seen in the markets as well as by a reduction of monies-in, as a direct consequence of furloughing or delays to asset transitions. The proposed 10 per cent hike in the general levy has been helpfully suspended which, at least, provides some respite and means that Master Trusts will not need to set aside even greater reserves, for the time being at least.
Thinking back to the start of the year, the same expectations stand but the pandemic will very much be a accelerant to a heightened pace of change - it will be more vigorous than anticipated a few months ago, and the economic environment will be a real test of a provider’s mettle with the winners being the fittest and most committed.