Master trust arrangements for occupational pension schemes are thought to be on the verge of a comeback. But not everyone is convinced this will happen just yet.
A master trust is a multi-employer occupational pension scheme where each employer has its own, effectively ring-fenced, scheme within the master arrangement. It is a concept that is particularly popular in Australasia and, while it has seen some demand in the UK in the past, recent years have seen more limited demand. It is thought the majority of employers are unlikely to have even heard of master trusts, although this may be about to change.
The defined contribution (DC) pension market in the UK currently falls into two main categories. At one end are trust-based occupational schemes, where employers set up their own pension arrangements, including taking responsibility for putting in place scheme trustees, while at the other end of the spectrum are contract-based schemes such as group personal pensions (GPPs), stakeholder schemes and group self-invested personal pensions (Sipps). These schemes are more hands-off for employers, which do not need to put trustees in place, with the governance left more in the hands of the employee and provider. Master trusts, however, straddle both of these spheres.
Tony Pugh, UK head of DC pension services at Mercer, says: “Master trusts, if you like, sit in the middle. It allows you to keep trustees in place but, as an employer, you don’t have to provide trustees.”
Master trusts are relatively cost-effective and offer a variety of other advantages including simplicity and expediency, says Mark Miller, principal consultant in employee benefits at Towry Law.
Historically, Standard Life has been one of, if not the largest player in the UK master trust arena. However, it no longer actively markets its master trust offering. Then last year SEI, a global provider of pension fund solutions, came into the UK marketplace with an offering that uses its manager-of-managers funds as an investment base. These two firms are currently the most commonly-recognised names operating in this sector.
Pugh believes master trusts may be on the cusp of a UK revival as employers start to recognise the need to provide more pension governance for their employees.
“There is a lot of talk at the moment that master trusts ought to have a good place in the market right now, simply because there is a lot of activity around shifting from trust to contract-type plans, where there is no-one looking after the individual member. There is more space and logic for a master trust now than there has been for a long time,” he says.
Ashish Kapur, defined contribution product specialist at SEI, also believes in the potential of master trusts. He says governance is becoming increasingly important, particularly after the Pensions Regulator issued guidance on the subject in January for employers to follow when offering contract-based schemes.
However, master trusts do have some downsides that need to be taken into consideration. Pugh points out, for example, that the trustees within these structures tend to be appointed by the provider of the master trust and there can also be what is known as “directed trusts”, whereby the company setting up the master trust can restrict the choice of fund manager, typically to themselves, at least as a starting point.
“So at one level they can be the be all and end all, [while] at another, the reality is they are normally relatively restricted,” he says.
Employers also need to make sure they are aware of just who is responsible for the selection and review of investments inside their particular master trust arrangement. The provider may not always take responsibility for this function, and it could fall upon directors and officers of the employer.
But Miller is not convinced master trusts will see a revival, instead believing the role of the professional or independent trustee is likely to come more to the fore, particularly for small and medium-sized employers.
Andrew Tully, senior pensions policy manager at Standard Life, is similarly not expecting a wave of new interest, believing that the likes of GPPs offer similar benefits in terms of removing the burden of trusteeship.
But Kapur adds: “Once we get closer to personal accounts and [employers] suddenly start looking at what personal accounts are offering and then looking at what their current arrangements are like, they will need to start reviewing what they have been offering and whether it has been adequate.”
This increasing focus on governance may also prompt employers to take another view on contract-based schemes. “The Pensions Regulator and the Financial Services Authority have only been issuing guidance to employers. If nothing happens, it is possible they could take a more stringent view of that and hard code the guidance into rules, laws and codes,” says Kapur.