Investment Thoughts and IdeasPersonal Finance & Investment

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.

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.


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.