The Mercer-Cardano deal will bring these numbers down again, but so far the move to consolidate the master trust market can hardly be described as a rush.
In addition, it is difficult to see where the attraction lies for Mercer in combining its existing master trust offering with that of NOW’s.
The first decade of auto-enrolment has been dominated by the struggle for most master trust providers to reach profitability.
The consultant-led master trusts have shown the way in this regard by focusing on the higher-value end of the market.
Meanwhile, those focused more purely on the SME employers and employees that AE bought into the market, like Nest, Now and Peoples Pension, have struggled much harder.
While the deal creates the illusion of an end-to-end provider, therefore, it is notable that Mercer has been clear that there are currently no plans to merge NOW with their own in-house master trust offering.
This suggests they too are cautious about intermingling their more profitable core client base with Now’s more challenging AE book of business.
The future too looks challenging. With significant amounts of proposed regulatory change on the horizon, including pensions dashboard, value for money, collective defined contribution/decumulation journeys and pot-for-life proposals, implementation across two master trusts operating largely independently presents a daunting task.
If Mercer cannot find some way of bringing the two entities together to find efficiencies, they could end up bearing the cost of these regulatory changes twice over.
Looking over the longer term, AE is rapidly altering the shape of the investment market in the UK, shifting it from a wealth focus to a mass market retail focus.
High volumes and low margins
Meanwhile, despite industry hopes to the contrary, the introduction of value for money seems unlikely to significantly decrease the focus on costs, especially in a mass-market context.
High volumes and low margins combined with an increasing scrutiny on value outliers are therefore likely to persist as operating realities for providers at the heart of the AE system like NOW.
At the same time, as master trusts’ assets and memberships grow, they will increasingly be seen as institutions that are core to the stability of the UK financial system.
Looking at what has happened to other similarly core financial institutions, such as banks and insurers, it suggests they are likely to attract increasingly stringent levels of regulation.
Taking all these trends together, becoming a heavily regulated, mass-market provider of retail financial services would be a significant strategic shift for an investment consultancy such as Mercer.
The deal has undoubtedly given them strategic options, but for it to be seen as a transformative moment in the DC consolidation journey depends strongly on Mercer’s ability and willingness to successfully navigate the technological, regulatory, efficiency and ultimately profitability challenges that lie ahead.
