Defined contribution master trusts in the U.K. could see an additional boost in assets as the U.K. Pensions Regulator pressures single-employer plans to step up their governance and investment oversight.
The Pensions Regulator has been on a mission to weed out poorly governed defined contribution plans in the U.K. for quite some time. After asking master trusts, also called multiemployer DC plans, to obtain new operating permissions to stay in the market, the number of DC master trusts was cut by more than half.
Most recent data from the regulator showed 38 master trusts operating the U.K. in May, down from 91 a year ago. Of those 38, about two-thirds are still in the midst of an approval process that requires payment of a £41,000 ($53,000) licensing fee and proof that they have the financial resources to pay up to £150,000 for the cost of complying with fiduciary duty regulations, according to the regulator's data.
In June, the regulator issued another order, directing single-employer DC plans with two to 999 members — an estimated 500 plans in the U.K. — to review their default options to ensure they deliver investment value to plan participants, which could further decrease the number of DC plans, according to sources.
The regulator wants to confirm that plans regularly review their default strategies and performance to ensure that plan trustees are meeting their legal obligations and committing to proper plan governance.
Industry sources said this increased focus on governance could lead to single-employer plan sponsors deciding they are better off moving the assets to a professional plan provider, such as a mater trust.
"Further consolidation of U.K. DC is likely as the regulator increases its focus on governance," said Gregg McClymont, director of policy and external affairs at B&CE, provider of the £7 billion ($8.9 billion) People's Pension, a multiemployer defined contribution plan. "To the same end, employers running single trusts will gradually move, I would imagine, toward the multiemployer trust model as a simpler, high-quality solution."
Obtaining scale to manage total costs, which cannot by law be higher than 0.75% of assets under management and administration, is a key objective of DC plan sponsors. As part of a master trust, employers could improve their governance and ability to diversify their asset allocation.
For example, scale makes it easier for plans to add alternative strategies to their default options to secure additional streams of income for participants from potentially higher-yielding asset classes.
But experts warned the new requirements will only make single-employer plan sponsors exit the DC business and add concentration risk in the retirement system.