What are master trust pension schemes?
Master trusts are defined contribution pension schemes, set up under trust law, which allow multiple employers that are unconnected with one other to participate. Each employer can set its own employer and employee contribution rates and usually has its own named section of the master trust.
Master trusts have grown dramatically since auto-enrolment legislation was introduced. They look after the pension savings of millions of individuals and can only operate if they are authorised by the Pensions Regulator and meet certain criteria.
These include that the trustees and others involved in running the scheme are “fit and proper persons”; that the scheme is financially sustainable; and that it has in place a “continuity strategy” for dealing with certain “triggering events”. These include losing authorisation and an insolvency event in relation to the scheme funder.
Master trust pensions are set up and operated by a provider, which can be a commercial or not-for-profit organisation. The provider appoints the trustees, who are usually independent of the provider and unconnected to the participating employers. There must be a minimum of three trustees and the chair must be independent of the provider.
What are the cost implications?
Employers will typically bear the costs of selecting a master trust and taking legal advice on the participation terms and conditions.
Almost always, the ongoing costs of investment and administration are deducted from the member funds as a percentage charge, rather than paid by the employer. Assuming the scheme is used for auto-enrolment, there is a cap on charges for the default fund of 0.75% but economies of scale mean that master trust charges are typically much lower than this.
Charges are negotiated as part of the selection process and can be influenced by what, if any, existing pension savings will be transferred into the master trust. The more funds that an employer can bring across, the lower the future charges will typically be.
Are there any tax or legal issues?
As registered pension schemes for tax legislation purposes, master trusts are largely subject to the same rules as other occupational trust-based pension schemes.
However, there are some tricky issues to watch out for when transferring benefits to a master trust. Employees who are currently able to take their pension from age 50 in their existing pension scheme may have to wait until 55 or even 57 to do so under a master trust. They can also lose the ability to take more than 25% of their savings as tax-free cash at retirement.
Employers will need to consider the terms on which they can participate in the scheme and be aware that legal advice may be needed if they later wish to switch and transfer members’ funds to another scheme.
The trustees have the usual legal duties, such as acting in the best interests of the beneficiaries, exercising discretions, appointing professional advisers and setting the investment strategy.
There must be ringfenced assets set aside to cover the costs of implementing the continuity strategy, which will typically aim to transfer the members into another authorised master trust.
What are the current market trends or developments?
The trend is towards consolidation as some providers look to exit the market. The Pensions Regulator has made clear that it would prefer to see a smaller number of larger trusts rather than a proliferation of smaller ones. At the end of 2023, there were 35 authorised master trusts in the UK, accounting for 26.1 million DC memberships and over £122.9 billion in assets, data from the Pensions Regulator shows.
There remains fierce competition on price, administration service standards, investment returns and options for members, such as having an app. Master trusts may also encourage other savings by offering a discounted individual savings account (Isa) alongside the pension.
Following encouragement to sign up the Mansion House Compact, a pledge by pension providers to improve outcomes for UK long-term savers, master trusts are looking at ways to incorporate unlisted private market assets into their default funds. These come at a higher cost, and are not as easily traded as listed equities and bonds, but are expected to achieve higher returns over the long term.
Who are the main providers and what types of schemes do they offer?
According to trustee and governance firm Zedra Governance, master trusts fall into several categories, including traditional insurers, where the master trust is part of a broader offering of workplace pension schemes, examples of which are Aviva, Standard Life and Legal and General; asset managers such as SEI and Fidelity; consultants which can offer a master trust to clients as an alternative to advising them on running their own individual trust scheme, such as Lifesight,(Willis Towers Watson), Mercer and Aon; fintech firms like Smart or Cushon; Nest, which was set up by the government as a scheme that must accept any employer that wishes to participate; and not-for-profits and traditional industry-wide schemes that fall under the master trust regime, such as Cheviot, TPT and Railways Pension Scheme.
A full list of authorised master trusts can be found on the Pension Regulator’s website.
Law firms, such as Sackers or Freeths, can advise on the legal set-up of master trusts.
