Need to know:
- Employers need to consider a range of issues when picking a master trust including financial security and future plans.
- Employers should consider what will work best for members, including investment strategy.
- It is important to keep any scheme under review to ensure it remains fit for purpose.
For some employers, the prospect of a master trust pension scheme, where firms are able to access the benefits of a trust arrangement without the cost and hassle of running their own pension scheme, will appeal in today’s complicated landscape.
Pharmaceutical firm Bayer, for instance, moved from a workplace trust-based scheme to a defined contribution (DC) master trust, following the introduction of the pensions freedom legislation in 2015. Mark Harvey, human resources business partner at Bayer, says: “With the increasing flexibility provided through pension changes we wanted our employees to be able to access these easily and seamlessly through a single provider. This wasn’t possible through our existing trust arrangement.”
Assess provider's financial securityAn obvious starting point when evaluating schemes is to assess the financial security of the provider, to ensure it is likely to be around for the long term. Alice Honeywill, pensions partner at law firm Burges Salmon, says: “Employers, above everything, need to be confident that employees’ pensions are protected so that they can afford to retire and to avoid future criticism. The new master trust authorisation regime, in force from April 2019, should help with this. The industry expects that the new tighter controls will lead to fewer master trusts on the market so employers should check for a long-term commitment to the market.”
Other factors to consider include whether the trust will accept all employees, especially if it is to be used as an auto-enrolment vehicle, whether its processes are compatible with its payroll software, and any costs and charges. Helen Ball, partner at Sackers, says: “[Employers] could also ask whether the provider is already working with The Pensions Regulator in relation to future authorisation, although the provider may well not be in a position to share such information.”
Understand future plansUnderstanding future plans is also important, particularly as the DC master trust market is relatively immature in the UK, says Jesal Mistry, senior investment consultant at Hymans Robertson. “For example, how does the provider intend to take advantage of the development in technology to improve the experience for members, or what does the provider do to ensure that its investment solution takes advantage of new investment ideas to deliver better outcomes?” he says.
Employers also need to make sure that schemes are appropriate for the members. Gareth Sawyer, managing director, financial re-engineering at Punter Southall Aspire, says: “We recommend that organisations spend a reasonable amount of time and investment in clearly identifying their optimal desired outcome. They should start by setting out what is important to their workforce and think about their past experiences with pensions; what has worked and what hasn’t. Once this has been documented, a working party or small team can then be established to undertake the typical analysis of the information gathered from the provider to map matches and/or gaps.”
Making sure investment strategies are appropriate to the workforce is vital. “Diversification is generally a good thing for protecting against losses, but over the longer term can mean members give up some return, which has an impact on outcomes,” says Mistry. “Encouraging members to pay more in generally leads to getting more out so it’s important to understand how a provider can encourage members to maximise their contributions.”
Member engagement strategyA good member engagement strategy is essential here, adds David Bird, head of proposition development at LifeSight. “A multi-channel, personalised communication strategy provides that adaptability, is proven to enhance engagement and should be a criteria when choosing a master trust,” he says. “All information should be jargon-free and easy to navigate, both online and offline.”
Employers should also consider how the support that is available to members, including how easy it is to make changes. Ivan Laws, pensions director at Ensign, says: “In addition, a master trust that offers a ‘cradle-to-grave’ approach, giving its members support as they approach and reach retirement, can be invaluable, particularly those that can offer members the ability to drawdown their benefits within the scheme, and remain members as they decumulate their funds.”
Once they have settled on a scheme, employers still need to take an active interest in how it is being run and performing, says Anthony Palmer, corporate financial adviser at Ascot Lloyd. “The employer should review [its] choice of master trust provider at regular intervals, in the same way that trustee boards are required to review the ongoing performance of their administrators, consultants and investment managers,” he explains. “This is the only way that employers can ensure their strategy will result in the best outcome for members.”
