Master trusts: Cracking the governance challenge
Almost 10 million people are now enrolled in multi-employer pension schemes*, with larger FTSE employers now being attracted by their more efficient governance arrangements
The UK's biggest companies are increasingly opting for master trusts as a cost-effective way of meeting the increasingly onerous defined contribution (DC) governance requirements that have come into force in recent years.
At the start of 2018, 9.9 million members and more than £16bn of assets were invested in 81 master trusts. This is up from just 0.2 million members in 2010 - according to the Department for Work and Pensions.
While the use of master trusts by small and medium-sized companies is well documented, the trend toward master trusts is now also progressing across larger companies. Aviva Master Trust has added three FTSE 100 companies to its own scheme in the last nine months alone, with Aviva's workplace benefits and pensions policy manager Dale Critchley stating: "As a leading provider of workplace pensions in the UK, we're well-placed to judge what's happening in the market, and what we're seeing is over 70% of large employer tenders coming in for master trust."
Increased governance
Tightening governance requirements for all DC schemes has made the job of trustees much more complicated, increasing the time trustees need to devote to their DC scheme and the need for costly advice, according to Critchley.
The Pension Regulators' guide to the Chairs Statement made it clear that it expect high standards of governance to be maintained. Trustee workloads are continuing to increase, there is a bigger focus on data quality, and more charge disclosure is going to be needed this year, along with environmental, social and governance (ESG) considerations next year. TPR's automatic fines for non-compliance must worry some trustees.
The pressure isn't only on governance. The abolition of short service refunds in October 2015 has led to an explosion of small pots in schemes with high turnover, raising third-party administration costs.
Critchley says: "The consequence is that diligent trustees are realising that the bar has been raised to the point where there isn't the capacity to do everything to the standard required by The Pensions Regulator."
This burden has in particular made larger employers more conscious of the reputational risk that TPR censure could bring.
Economies of scale
A master trust offers economies of scale, which means lower costs. Whether all costs are met from member fees, or there's an explicit employer fee to keep member charges very low, employers receive certainty around future costs - as separate costs and services are bundled into a single package.
A master trust's board is bound to solely focus on the members' interests, which provides reassurance for existing scheme trustees. "The complete independence of a board of trustees often proves to be a plus point," adds Critchley.
Every master trust must reveal the amount it spends on its board in its annual report, and accounts that clearly identifies how much "good governance costs" according to Critchley. "It can also help employers gauge how hands-on the trustee board is," he adds.
Critchley believes a move to master trust isn't necessarily a cost reduction exercise, and that the quality of what's offered to employees is a major driver, with employers often paying additional fees to cover bespoke communication campaigns, or to reduce employees' overall annual management charge.
A case in point is pension freedoms. Members increasingly want a drawdown option without having to transfer to another scheme; this is a demand many own trust schemes have struggled to meet. Master trusts can fulfil this requirement more easily, as their scale means they can offer high-quality governance and make the full range of at-retirement solutions available.
Moving to a master trust
Large employers are more likely to have individual nuances. Master trusts that operate in this area of the market understand the importance of flexibility, which can be crucial for larger companies with thousands of employees, and thusCritchley notes a "one-size-fits-all approach" is rarely acceptable: "The trustees, the client, their advisers and the administration provider have to work together to deliver a slick solution for members" he explains.
When it comes to reassuring procurement functions that the scheme is a good choice, Critchley explains that independent audit of the scheme and provider's administration is important. The Pensions Regulator's Master Trust Assurance and the Pensions and Lifetime Savings Association's Pension Quality Mark Ready accreditations cover a range of attributes from the trustees' governance capabilities to the quality of member-facing communications. The master trust authorisation programme, which comes into force from October 2018, will provide further reassurance. But this doesn't mean that there aren't going to be differences: "Even with all of these standards advisers will maintain a central role in the market" according to Critchley.
The determining factor when selecting a master trust is often the provider's experience - from the project managers to the asset transition team - in meeting the needs of similar employers and schemes.
For Critchley, employers need to be confident that a master trust provider is able to demonstrate a track record of investing in its proposition, and provide a commitment that this investment will continue.
The ability to offer complimentary solutions is also important. "We're providing additional savings products for more than 40,000 employees in one employer's section of our master trust," says Critchley. "We can offer discounts on Aviva's retail products or work with a company's flexible benefit providers."
Another aspect to consider is the ability to transfer the whole of an employer's section to another scheme if things don't work out. Many large employers realise the importance of maintaining the bargaining power of their entire scheme if it were ever needed. "It's worth checking that prospective master trust rules allow a bulk transfer of the complete section, especially if there's a large number of deferred members," says Critchley.
For more information on the Aviva Master Trust, please visit www.aviva.co.uk/master-trust
* Draft Occupational Pension Schemes (Master Trusts) Regulations 2018, Guy Opperman 10/07/2018