Catherine Lafferty looks at the resurgence of master trusts
Pension master trusts, which originated in the 1950s, are back in business, thanks in part to the increase in pension savings brought about by auto-enrolment. The rise of master trusts was instigated by the National Employment Savings Trust (Nest). Nest was established as a catch-all arrangement by government for those employers who were unable/unwilling to attract terms from the traditional pension market.
SEI UK managing director Ian Love notes that in 2007 it was one of the first master trust providers on the market; now there are between 30 and 50. Further growth in the market is expected.
Master trusts are trust-based DC schemes established for non-associated employers, or by insurers or investment managers acting as DC pension providers. They are multi-employer arrangements in which each employer has their own division, with one trustee board that has decision-making autonomy for each division. The task of a master trust’s independent trustee board is to look after the interests of that pension scheme. This is the important distinction between them and group pension plans, which do not have governance trustee bodies looking after their interests.
Benefits
Love says that when setting up its master trust, SEI felt employers faced a choice between quality with either trustee-based schemes or cheapness by directing employees to an insurance company.
He explains master trusts aim to deliver the best of both worlds, with governance and oversight provided by independent trustee boards alongside high quality investments, administration and communications.
Out of these benefits, the key attraction is that it enables employers to provide schemes with high quality governance, usually at lower costs than a single employer scheme.
Another advantage is economies of scale. Costs can be reduced through bulk purchasing, one group of professional advisers is required for the whole scheme rather than for each division, and one trustee board is needed rather than one for each section. Master trusts also offer accounting and governance consolidation and strong governance and oversight of investments.
“For any scheme the advantages have to come down to better benefits for members,” Love says. “Master trusts aim to get that by governance and oversight and will ideally provide access to as a wide range of high quality investments as well. When it comes to Investment options the default strategy is should be customised to the membership of the company. We think it also provides for more effective and tailored communications for members.”
Big is beautiful?
Hargreaves Lansdown head of financial planning Danny Cox agrees that the theoretical benefits of a master trust solution are scale and cost, that savers benefit from pooling together thousands of pension scheme members and multiple employers.
However, he cautions that low cost does not necessarily mean good outcomes: the opportunity cost is choice, implementation and engagement, and portability.
“Ultra-low cost schemes provide little, if any, scope for wider investment options and employees typically have a Hobsons’ choice of a single passive solution,” Cox says. “What is clear is that when employees are involved in an implementation process that engages them with their retirement planning, they take far more interest in how much and how they invest – two far more important issues than cost.”
Contract-based solutions are far more likely to provide the choice an engaged employee seeks, Cox feels, noting too that such schemes can easily be taken from one employer to the next. Any difference in cost will be far outweighed by additional investment and the potential for improved performance, he says.
Other potential disadvantages to the master trust model identified by JLT Employee Benefits director Margaret Snowdon are functions of their advantages. Snowdon points out that when it comes to pensions, big is not always beautiful. “The UK has a mistrust of large entities so prefers to see competition, while continuing to expect unrealistic economies of scale,” she comments.
There is also a risk of poor governance, especially if cost reduction is a major concern. Crucially, where there is poor governance in a master trust it will impact a greater number of employers and member benefits.
A master trust is more efficient with uniform scheme design and delivery, but therefore there is limited room for tailored solutions, Snowdon says, adding that demands for tailoring from the early auto-enrolment adopters made master trusts challenging.
Love agrees that there is a possible conflict of interest within master trusts, especially where one company is providing all these services and there isn’t independent oversight, but contends that the likelihood can be minimised by independence, governance and by having a best of breed approach, rather than by being limited to just one provider.
The other key perceived disadvantage to the master trust model is higher costs than a contract-based option, but Love thinks that the additional governance and administration are worth the extra expenditure.
“In 2007 we tried to understand what constitutes a good outcome for pension scheme members and for us it came down to two three clear areas; first very good investments, and second robust administration and finally very good and clear and engaging communications and administration,” Love says. “However, these two skill sets are rarely found in one organisation, so from our perspective it is important to the optimum solution had to be via have a best of breed master trust.”The master trust model does not suit everybody. Cox explains that master trusts best suit those employees who will never engage with their retirement planning and will be content with minimum contributions to passive solutions.
“Contract-based schemes favour progressive employers looking to help their employees gain an advantage with their retirement planning, seeing this as a route to provide a scheme which will act as a remuneration and retention tool, rather than a tick-box exercise.”
Looking ahead
There remain issues master trusts will need to address. At the heart of them is scale, Snowdon says, pointing out that the real benefits of the solution depend on scale to get the economies that the providers expect while at the same time delivering good quality. She thinks there are probably too many master trusts for the auto enrolment solution, making future consolidation more likely. She notes too that the pressure for charge capping will discourage some players, where scale is not achieved.
Snowdon is broadly optimistic about the future for master trusts. “The fact that in the future AE schemes will be smaller means that vanilla solutions will be essential and this will make master trust more attractive to commercial providers.”
However, Snowdon warns that action is needed to deal with occasionally messy legacy DC schemes, where governance may be weak or where contract-based solutions have not delivered. DC master trust solutions could help if providers have the appetite for the challenge, she says.
Fees and charges are never far from discussions about pensions and the Office of Fair Trading has explored capping master trust charges, stressing the need for value for money.
Another potential challenge arises from the increasing number of master trust providers. Love points out this may present a problem from a regulatory perspective. He says there are many different types of providers from many different backgrounds and that it will be important to identify possible conflicts of interest.
Love notes that The Pensions Regulator issued a code of practice in recent months in an attempt to ensure good governance, oversight and outcomes. “Members should be reassured that master trusts are regulated but contract-based schemes are beyond that,” he says.
Catherine Lafferty is a freelance journalist
