The master trust market is expected to be worth £300m by 2026 compared to a value of around £20bn now, according to research by Hymans Robertson.

The introduction of auto-enrolment has increased master trusts’ popularity; the funds now account for 35 per cent of the workplace pensions market. Seven million defined contribution savers are now invested in these vehicles.

“Increasingly, master trusts are viewed as the DC vehicle of choice for employers - this is largely due to the attractiveness of fully outsourcing DC delivery but, at the same time, retaining the attractive features of occupational pension schemes. Coupled with economies of scale and the significant downward pressure on pricing, it’s easy to see why they have appeal and why the market is expected to grow to £300bn by 2026,” Hymans Robertson head of DC investment proposition Anthony Ellis said.

“Until now there has been no recognised method of comparing relative value between the different master trust providers. Employers, and more importantly their people, should be able to clearly see that value. In assessing performance, the sole focus mustn’t be on returns. It’s also vital to look at the amount of risk being taken at different stages of the savings lifecycle to ensure it’s appropriate throughout.

“Equally, fees should not be looked at in isolation; what should be examined is the relative value of those fees against what they deliver. Ultimately, if a higher priced strategy has generated a better member outcome relative to a lower cost strategy over the relevant period (after taking into account all fees) then that represents better value.”

The report by Hymans Robertson, has compared the performance of the biggest master trust providers’ default funds, which account for 94 per cent of the market. It looks at the three phases of investments; the growth phase (30 years to retirement), consolidation phase (5 years to retirement) and the pre-retirement phase (1 year to retirement).

In the growth phase, Ellis said that whist the majority are taking enough risk, the focus on short term volatility reduction by some is costing members through lower long term net returns. “In these cases this is likely to result in poorer member outcomes - those strategies that have embraced higher risk asset classes have outperformed the strategies with a heavy focus on risk mitigation,” he said.

“In the consolidation phase, where the focus should be on delivering solid returns but with a significant element of capital preservation and risk reduction, the picture is mixed. The data shows that some have delivered strong performance with commendably low levels of risk. Others have delivered lower risk but at the cost of lower (but still relatively strong) returns. While some have delivered strong returns but with high levels of volatility.”

For the pre-retirement phase, Ellis said the overall the market has delivered “very strong returns” for members close to retirement. However, Hymans Robertson believes that the majority of providers have carried too much risk in this phase.

“At this stage investment risk should de dialled down significantly and the investment strategy should be consistent with the member’s decision at retirement. At present, due to low fund sizes, for many this decision will be to take their benefits as cash. And statistics from the FCA Retirement Outcomes Review support this. Over 53 per cent of DC pension pots accessed at retirement are fully withdrawn, and 90v per cent of these pots are less than £30,000 in size. In this context it raises a question mark over exposing DC investors to market risk and market falls.”

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