Defined contribution (DC) master trusts’ annual expenditure has been growing year-on-year, with the boarder industry unlikely to achieve break-even on costs until around 2025, analysis by the Pensions Policy Institute (PPI) has found.

The report, commissioned by Now Pensions, found that cumulative expenditure to date has reached around £1bn, with costs expected to continue to grow.

It highlighted the need to cover initial start-up and running costs until levels of membership and assets have grown sufficiently as the “greatest challenge” to the financial sustainability of master trusts, emphasising that running a master trust is “an expensive proposition”.

The PPI noted that after breaking even on costs, the industry may generate annual profits which will accelerate as the funds under management grow.

However, it clarified that “in reality” there may be some reduction in the profits as providers seek to achieve a competitive advantage by reducing their charges, while still having a large enough pool of assets under management to achieve a profit from the charges.

The report also highlighted a number of “known future challenges", which are likely to impact master trust costs moving forward.

This included data cleansing exercises for pensions dashboards, which the PPI said are likely to present additional costs for master trusts, both on an immediate and ongoing basis.

Whilst acknowledging that costs of the dashboard are difficult to predict, the report highlighted the Department for Work and Pensions’ estimates in the Pensions Bill 2020 Impact Assessment, which suggested that large schemes could face implementation costs of around £200,000 each.

Medium-sized schemes meanwhile could face implementation costs of around £75,000 each, as well as sharing the cost of £100,000 per administrator.

However, the PPI clarified that over the longer-term, these costs may be offset by lower costs in other administrative areas as a result of higher quality data.

Industry experts have previously raised concerns over the potential costs of dashboard data exercises on schemes, although ITM today argued that dashboard data shouldn't be an "apocalyptic ask" and that the industry "stands to benefit too".

The PPI's report also highlighted potential costs associated with small pots belonging to deferred members, noting that these are likely to become an increasingly important issue as job mobility continues to grow.

This follows previous PPI analysis, which revealed that without policy change, the number of deferred pots in master trust schemes could grow to 27 million by 2035.

The PPI emphasised that whilst active pots are more continuously administered, schemes with a greater proportion of deferred pots may experience costs that are particularly high relative to their assets under management.

It also acknowledged the likely impact of the ongoing pandemic on master trusts, noting that whilst the full impact is “not yet certain”, a reduction in overall contribution levels as a result of increased unemployment and volatility are likely to impact master trusts’ income from charges, at least in the short term.

It clarified however, that the impact of the pandemic would depend on the type of charging structure in place, and represent "just one of the costs that may loom on the horizon for
master trust pension schemes".

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