The appeal of master trust pension schemes

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• Master trusts can offer employers reduced pension administration costs and increased governance.
• The cost efficiencies obtained through a master trust are likely to depend on a number of factors, such as the age profile of pension scheme members and staff turnover.
• One disadvantage of master trusts is that, typically, the pension provider manages the appointment of the board of trustees.


Case study: Marks and Spencer finds a pension master trust bargain

Marks and Spencer will slash 40% off annual management charges for its pension scheme by implementing a master trust arrangement. The retailer hopes the new arrangement, set up and managed by Legal and General, will prepare it for auto-enrolment and ensure compliance with the pension reforms. Its staging date is November 2012.

Marks and Spencer’s scheme is the only one being managed by the new board of trustees, which deviates from the typical master trust structure involving multi-employer schemes, and will be the only scheme the retailer uses for auto-enrolment. Initially, employees will be auto-enrolled into the first tier of the scheme, which offers employer contributions based on average defined contribution (DC) rates in the UK.

After a fixed period, employees can join the second tier of the scheme, with higher employee and employer contributions. Working with Hymans Robertson, Marks and Spencer built an auto-enrolment system that would interface with payroll and carry out all the regular checks required under auto-enrolment, such as employee eligibility.

Julie Parker-Welch, reward manager, pensions at Marks and Spencer, says: “We needed a scheme that would help us meet our auto-enrolment requirements. The master trust does this, but has the added advantages of allowing us to maintain flexibility, good governance and clear communications with our staff in the format we want.”

The new arrangement will see Marks and Spencer transfer 10,000 of its employees from its current DC pension scheme into its new master trust-based plan.

Master trusts can help employers reduce pension scheme costs and improve governance, but there are downsides to consider, says Nicola Sullivan

Master trusts can help employers reduce their pension scheme administration costs while increasing governance, which is an attractive proposition as auto-enrolment approaches. But, as with any employee benefit, due diligence to assess master trust suitability for a workforce is key.

Master trusts typically involve a board of trustees who manage a range of employers’ pension schemes. The volume of funds that can be managed within this structure enables trustee boards to achieve large economies of scale in, for example, investment fund annual management charges and administration fees. But employers retain the right to determine contribution levels.

Darren Philp, director of policy at the National Association of Pensions Funds (NAPF), says: “What employers are seeing is a group personal pension (GPP) or other traditional contract-based pension with a trustee wrapper around them. The pension provider is saying ‘we want to set up a trustee board to oversee what we are doing’.”

But there are disadvantages of master trusts. For example, unlike traditional trust-based pension scheme arrangements whereby an employer takes responsibility for appointing a board of trustees, master trust boards are typically set up by the pension provider. This could create a potential conflict of interest, because the provider is, in effect, paying for the board of trustees says Philp. “Could the trustee board ever say ‘we are not happy with this provider’s services?’ It could say that, but what power does it have to go somewhere else?”

Nevertheless, the level of governance achieved through a master trust generally outweighs such issues. Flexibility around investment management is a case in point. Paul McBride, director of Legal and General Trustees, explains: “It is easier to maintain and change investment strategies over a period of time than it is under a GPP regime. That is simply because the trustees own those assets and can make decisions on behalf of members, whereas in a GPP environment, the pension provider has a contract with the individual members and, generally speaking, has to achieve a measure of consent before it makes any changes.”

Designing and managing investments

Alan Millward, director of corporate benefits at Jelf Employee Benefits, adds: “If there is a set of professionals that has responsibility for designing and managing the range of investments available and, in particular, the default fund, that has to be a good thing.”

Another advantage of master trusts, particularly for smaller employers, is the access they give to good-quality pension schemes while removing the need to manage the associated administration and governance.

For larger employers, there is the opportunity to work with their master trust provider to design a more bespoke offering. Tim Middleton, a technical consultant at the Pensions Management Institute, says: “Larger employers are more likely to have experience of running their own scheme and would want some control over the scheme offered so, rather than buying something off the peg, so to speak, they would want to have end-to-end involvement in its design and governance.”

However, service levels are typically determined by members’ contribution levels rather than scheme size, says Millward. “When [insurers and providers] put a price on a group pension scheme, they are looking at the average levels of contributions going into it, the age profile of the membership and how long that membership has got until the expected retirement date,” he says. “The insurer will also look at the turnover of staff, how many people will be coming in and out of the scheme each year. None of these things has anything to do with scale and the size of the pension scheme; they are all to do with the quality of individual members.”

At the moment, master trusts, like other trust-based arrangements, allow for employer and employee contribution refunds if a scheme member leaves within two years of joining. However, as outlined in the Department for Work and Pensions’ consultation Meeting future workplace pension challenges: improving transfers and dealing with small pension pots, published last year, the government plans to abolish this practice from 2014.

Nevertheless, master trusts and other multi-employer pension scheme arrangements may be just the ticket to provide employers with high-quality, cost-effective pensions. All they need do is assess such schemes’ suitability for their workforce and organisation.

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