Group personal pensions in a master trust world

Employers are recognising the governance and economical advantages that master trusts offer over group personal pension schemes.


  • Master trusts have a governance advantage over group personal pensions (GPPs) in terms of investment monitoring, default funds and annuitisation.
  • They can also offer significant economies of scale and are cheaper than most GPPs.
  • However, not all master trusts will survive the current demanding and low-margin market.

Master trusts, pension schemes designed for multiple employers under a single trust arrangement, are enjoying a renaissance as the vehicle of choice for ‘thinking’ employers to comply with auto-enrolment.

The mass-market potential offered by auto-enrolment has encouraged the launch of master trusts by traditional pension providers such as BlackRock, Standard Life, and Legal and General, while new providers have moved in from abroad, such as Now: Pensions, an arm of ATP, which runs Denmark’s statutory pension scheme for 160,000 employers.

Traditional master trusts are also opening up, such as B&CE’s The People’s Pension, which previously provided workplace pensions just for the building trade; The Pensions Trust, originally founded for social workers in the voluntary sector; and BlueSky, set up by the Electrical Contractors’ Association and the trade union Unite.

The quasi-government scheme the National Employment Savings Trust (Nest) is also based on a master trust structure.

Take care of governance

A key advantage of master trusts for employers is that they take care of governance issues, such as investment monitoring, default strategy and advice for members coming up to selecting an annuity, usually by way of an independent governance committee. This set-up generally produces a better outcome for members, while relieving employers of appointing trustees or meeting the regulatory and audit costs of trust-based schemes.

The other advantage is that master trusts are co-operative arrangements, with pooled assets and shared costs allowing economies of scale. Contributions are treated as a single investment rather than as multiple accounts.

Paul McBride, director at Legal and General Trustees, says: “Employers are recognising that investment governance in a master trust will invariably be more effective than in a group personal pension (GPP). An employer can do all the monitoring of its GPP default and [do-it-yourself] DIY funds that it wants, but the overwhelming majority of GPPs give [employers] very little opportunity to induce change even when they know it is time to do so. They are not a party to the contract and have no rights or obligations under it.”

Lack of independence

However, some master trust products have been criticised for lack of independence and potential conflicts of interest, particularly if the trustee board, investment managers or administrators are tied to the trust provider, rather than a traditional trust structure where the trustee body sits above all other functions and has a free hand on major investment and administration decisions. For example, in a traditional open-style master trust, it is possible to transfer to a new asset manager if something goes wrong.

The Pensions Regulator (TPR) has added its voice to concerns that such trustee boards will, in practice, be hamstrung, and in January 2013 it launched a consultation on trust-based defined contribution (DC) schemes. However, many industry bodies, including TPR itself, the National Association of Pension Funds (NAPF) and The Pensions Institute broadly favour the master trust design because it enables small employers to achieve good outcomes for staff through economies of scale.

Master trusts typically make an annual management charge of 0.3%, plus fund charges, which vary depending on how active and specialist the fund is. Charges total about 0.62% for members on the UK median annual salary of £26,500. There is no great difference between one master trust’s fees and another’s, except for Nest, which is levying 1.8% upfront on contributions to repay the government’s loan for its establishment costs. Now: Pensions is also offering a discount until 2018.

The Master Trust Association was formed last year and one of its early initiatives was to work with the NAPF to extend the Pension Quality Mark to include a ‘Pension Quality Mark Ready’ brand, enabling employers to identify master trusts with good governance, low charges and clear member communications. Once a scheme has attained Pension Quality Mark Ready, employers that use that scheme will be fast-tracked to obtain the Quality Mark for themselves. All they need do is show they meet the standard on contributions, which is 10%, including at least 6% from the employer.

Building critical mass

One important consideration for employers is that not all master trust providers are likely to stay the course in this low-margin, high-volume sector. There is currently a scramble to build critical mass while larger employers are auto-enrolling, but smaller employers that hit their staging dates in 2017 will be much less attractive. TPR has indicated durability is itself an important consideration.

Ken Anderson, head of DC solutions at Xafinity, says the problem is exacerbated by the fee structure, which is based on a percentage of the funds in the scheme.”In the early years, the funds under management will be relatively small and it will take a long while for those funds to grow. The market is likely to contract sharply, just as the stakeholder pension market did after its launch in 2001.”

Malcolm Delahaye, director at Supertrust, says: “GPPs became popular because they guaranteed no employer involvement and no trust administration expenses. Until recently, there were no master trusts as an alternative. Now there are, the real issue is around governance. Employers are realising that GPPs involve continued responsibility for governance, including the governance of past employee accounts, and see the advantages of distancing themselves from this responsibility by putting a higher level of scheme governance in its place through trustees.”

But the GPP market is not finished yet. Dean Wetton, senior adviser at Dean Wetton Advisory, says: “GPPs will continue to be used because they are a comfort zone for large parts of the adviser market and because some employers believe they have no obligation to improve governance on behalf of their workforce and see this as a way of getting rid of the problem. They were probably burnt by defined benefit schemes, or have transitional workforces. The insurers are also improving their offering, so the governance gap will not remain as large as it is now.”


CASE STUDY: Wavin Pension Trust gives members support around choices

Wavin, the UK’s oldest supplier of water management, plumbing and heating systems, established the Wavin Pension Trust, a branded section of the National Pension Trust, last September in preparation for auto-enrolment. There are currently 266 members in the trust, which is run alongside two defined benefit (DB) plans.

The scheme offers a range of multi-asset lifestyle strategies and 16 self-select investment options. Brian Baker, Wavin’s compensation and benefits manager, says: “The independent professional trustee keeps all the investments under review, amending and replacing them where appropriate. This gives us significant comfort that our employees are being appropriately supported with their investment decisions.”

When the organisation closed its DB schemes to new entrants in 2005, it put in place a stakeholder arrangement, but, given the advent of auto-enrolment, it decided to see if there was anything better it could do.

“We reviewed the pension arrangements available and opted for a master trust,” adds Baker.
“It became apparent that each master trust is different and, for us, the strength of the scheme’s governance was important. The trustee board meets at least quarterly to manage the arrangement on our behalf. We are provided with a regular stewardship report and can meet the trustee at the quarterly employer forums if we wish.”

The master trust Wavin selected provides support around investment decisions, and keeps investments under review throughout an employee’s membership, such as supporting the employee’s decisions to select tax-free cash, an annuity or income drawdown.

When an annuity is selected, the National Pension Trust supports members to obtain the most competitive terms from the whole market, unrestricted by any pre-determined panels.

“The quality of the National Pension Trust enabled us to obtain the NAPF’s Pension Quality Mark, showing the quality of our pension provision,” says Baker.