Professional Pensions spoke to three leading providers asking them why employers should choose a master trust; and how these schemes can improve investment and at-retirement options. This is what they said…
Head of DC solutions
Ken Anderson is head of DC solutions at Xafinity. He has responsibility for the development and management of DC pension solutions for Xafinity including its master trust solution, the National Pension Trust.
Head of master trust governance
Capita Employee Benefits
Paul McBride is head of master trust governance at Capita Employee Benefits. Prior to joining the firm at the end of 2015, he was the principal architect of the Legal & General Mastertrust.
Principal investment consultant
Joanna Sharples is a principal investment consultant at Aon and has 14 years of experience advising UK pension schemes on pension and investment issues. She is also a senior member of Aon's DC team.
What do you think are the key reasons why employers should consider a master trust?
Anderson: Master trusts offer value for money for their members through economies of scale. Multiple employers share the benefits of high-quality administration and communications.
They also have a strong governance structure; this removes risk for the employer by outsourcing the role, and reassurance in the quality of that oversight by adhering to a scheme with independent and, frequently, professional trustees
In addition, there are low ongoing costs for the sponsor; as strong governance lies at the heart of a master trust, there is not the need for the cost of additional input from consultancies.
Finally, master trusts are a single solution for sponsors that meets multiple defined contribution scheme challenges: fund accumulation, full freedom and choice functionality at-retirement, plus solutions for deferred members and AVC funds.
McBride: The UK has been accelerating away from the unbundled, single employer DC trust model towards a delegated, bundled solution for several years and I see nothing on the horizon that might reverse that trajectory.
Before 2012, when private sector workplace pensions were voluntary arrangements, employers had legitimate reasons to establish and maintain their own trusts – that was a key part of recruit and retain differentiation strategies. But now that workplace pensions are compulsory, and all new employer entrants are choosing a bundled solution, the question employees ask about pensions is not 'do they run a good scheme?' but, more likely, 'what contribution do they throw into my pot?'. Little thought is given to the considerable costs, and hassle, employers face in running their own schemes.
If, despite all the good intentions, hard work, cost and hassle, your own trust no longer ticks a box in your employment satisfaction surveys, it may well be time for you to consider an outsourced, bundled solution. That leaves a straightforward choice between master trusts and group personal pensions (GPPs).
GPPs are retail products, loosely wrapped to create a workplace solution. The COBs (Conduct of Business Sourcebook) regulatory regime can translate poorly to the workplace arena but, more importantly, so too does contract law – the legal branch under which GPPs operate.
Operating under trust law gives master trusts a key advantage in that trustees can, and indeed are legally obliged to, make change for the betterment of the membership. GPPs have long filled a product gap but if the law had permitted non-affiliated/non-associated employers to operate under a single trust back in 1988 (it didn't), I rather doubt that the gap would ever have existed.
Sharples: One of the main reasons why we believe employers should consider a master trust is the level of governance and oversight trustees can provide. Over the last few years we have seen increasing governance requirements placed on trust-based schemes, for example by The Pensions Regulator; a master trust helps alleviate that governance burden.
At the heart of the governance framework in a master trust, such as The Aon MasterTrust, is a corporate trustee, or trustee company; ideally we believe this board should consist entirely of independent experienced directors. The overriding responsibility of the trustee company is to the members; this is key to delivering better member outcomes and ensuring that all members, whether they are active, deferred or retired, are looked after.
The legal structure also offers greater flexibility around the ability to make changes, for example to the default investment strategy.
To what extent do master trusts improve the investment options available to members?
Anderson: Master trust investment options are typically restricted in number. This limits funds to those that have a clear role to play in portfolio planning for members and limits the confusion of choice that higher numbers of alternatives are now known to create.
Master trust investment options are also quality assured as the trustees take independent advice on asset allocation and manager selection to ensure investment options and managers remain appropriate.
In addition, they are white labelled; so that asset allocation can be amended and managers replaced proactively.
And, unlike GPPs, Mastertrusts are able to effectively react to changes to legislation. For example, most mastertrust default investment options have adapted to reflect the new pension freedoms – the legal structure of GPPs can prove a barrier, creating substantive risk for members and employers.
McBride: Trust law is enabling. Trustees have duties to act in the interests of members and the law is framed in such a way that they can satisfy that duty unencumbered by the legislative and regulatory environments that can impede GPPs.
To induce better member outcomes, it is imperative to avoid stale and legacy investment strategies; this is easily and demonstrably achievable in a trust environment. By contrast, the encumbrances of contract law, and the way COBs is designed to protect single retail customers rather than potentially huge cohorts of customers in the workplace environment, makes it ‘challenging' for GPP providers to unilaterally change members' default investments – notwithstanding the undeniably good intentions of wanting to do so.
Investment change – even for the better – is a notoriously difficult challenge for GPP providers, one that their IGCs will by now fully understand. Many GPPs today have several different default strategies within the same product. This isn't reflective of great design – it's reflective of how challenging change is. As a consequence, many thousands of GPP members are trapped in default designs of yesteryear.
Sharples: Typically, many DC providers have offered a wide range of fund options and for many members this choice is overwhelming. In addition, it can be difficult to remove and replace under-performing or legacy strategies / funds.
Within a master trust the trustees are responsible for the funds. As a result, the fund range tends to be more limited and can be made more relevant to the members, with ongoing trustee oversight. A carefully selected but concise range of funds should enable members to make decisions more easily. Furthermore, within a master trust structure the trustees should have the ability to make changes to under-performing or legacy strategies / funds, helping to ensure the fund options remain up to date.
How can master trusts help deliver better at-retirement options and support for members?
Anderson: Few employer sponsored occupational schemes have the desire or ability to offer the full range of retirement flexibilities.
Most GPPs do not offer members the ability to access the full range of retirement options, or if they do, do not provide the support that trustees of master trusts are legally able to afford.
To access flexi-access drawdown, most members of GPPs are forced to transfer out to SIPPs at additional cost and risk. While SIPPs offer full flexibility, they tend to be expensive and offer little member support. Further, as a regulated product, any advice or support should only be given by a regulated individual at not insignificant cost.
Many master trusts are able to offer all the freedom and choice options, including flexi-access drawdown. Unlike SIPPS, they are not regulated retail products with the compliance implications (and cost) that entails; they are occupational schemes whose scale and trustee governance structure means they can effectively support members.
Master trusts' professional trustees are able to effectively support members to understand the most appropriate option(s) for them personally, access their savings in the most tax efficient manner and continue to invest their members' savings appropriately.
McBride: Freedom and choice changed the essence of workplace pension schemes. They are no longer savings vehicles over a (near) certain timeline. That means that traditional single employer schemes that don't extend into decumulation will do only part of the job.
Commercial master trusts differ from those single employer trusts in three key ways. First, they must offer full decumulation flexibility in order to attract and retain employer customers who will naturally be seeking the best all round solution for their workforces. Second is that unlike an unbundled scheme, a bundled decumulation solution has no financial impact on the employer – they don't have to provide or pay for administration services that support freedom and choice. Third is that the master trust trustees must have, or must acquire, the skills and experience necessary to deal with these new and distinct membership demographics, including ensuring that efficient, user-friendly communications and modelling tools are available to help members along that journey.
The regulatory community should support and encourage single employer trusts to engage with good master trusts so that their members can access freedom and choice in a safe and familiar environment. I hope that Pensions and Lifetime Savings Association's proposals for a Retirement Quality Mark will do much to engender this.
Sharples: Master trusts are well placed to be able to offer flexible retirement solutions for members, enabling them to remain within the master trust both before and after retirement. Providing access to a range of at-retirement options, for example, an open market annuity option or in-scheme drawdown, will provide the vast majority of members with sufficient choice and flexibility. Sitting alongside this, members are able to access support – master trusts can supplement guidance through communications and education, simple decision points and tools, and clear sign posting for members wanting further advice.
Added to this is the overall trustee framework and oversight covering active, deferred and retired members.
How can employers choose between the master trusts currently on offer – what are the key differentiators between different providers?
Anderson: A number of criteria used to assess DC scheme providers apply to all scheme structures including mastertrusts. These cover commitment to market and sustainability, investment offering, member communications, administration, service levels and pricing.
However, key differentiators that apply specifically to mastertrusts include:
- The Pension Regulator's list of master trusts with the Master Trust Assurance Framework. These master trusts have been subject to external audit of process and further due diligence by the regulator before going on the list - only a minority of master trusts have achieved this standard.
- Pension Quality Mark Ready – an industry kitemark of quality that is awarded to master trusts that offer clear communications, high member support and low charges.
- Freedom and choice; many mastertrusts do not offer members access to the full range of retirement flexibilities.
- Track record; the market has expanded rapidly and it is vital that providers are able to evidence processes and systems have been tested in the field, particularly where it comes to retirement flexibilities.
McBride: The starting point should be the external accreditations, the Master Trust Assurance Framework in particular. This isn't gained lightly. I otherwise see three key attributes of a good master trust.
First is the founder's pensions pedigree and its long-term financial commitment. Are pensions a key business line? Does the founder have experience, expertise and form, and over what timeframe? What types of customer have they attracted previously, and why? Is administration something they do well or something they get away with? What types of customer do they want to attract in the future? Have they invested, and do they continue to invest, in technology and people that demonstrate commitment to the market? Are there external accreditations that demonstrate that commitment? How would their reputation be impacted by closing, or investing inadequately in their master trust, or by poor market or regulatory sentiment towards it?
Second is product structure and flexibility. There are several models, but all tend to polarise towards two distinct models which are:
- Rigid and off the shelf (fixed charges, fixed investment options, single communication strategy, no role for employers beyond statutory duties).
- Flexible designs facilitating a choice of off the shelf or a degree of bespoking tailored towards an employer's specific membership demographic.
The latter structure offers a better solution for employers concerned that the one-size-fits-all investment strategy is not necessarily reflective of their workforce, or who have different demographics within their workforce, or who have a strong HR brand they wish to extend into their pension solution.
Third is the effectiveness of the fiduciary and governance structure. This is, admittedly, a more nebulous concept and one which may not play out for many years but there are clues. The trustee composition and background matter – ask about this and about the support network that underpins them. The chairman's statement will showcase the trustees' views on value for members, and set out what they have done and what they want to do to achieve this. Another clue will be found in the people and governance sections of the Master Trust Assurance Framework.
Sharples: With such a large number of master trusts available, it's important to focus on a few key areas. While cost is a factor it should not override value for money and good member outcome principles. In our view the key differentiators include the member experience and communication approach, technology available and the design and structure of the investment options. In addition, provider ability and commitment to invest in keeping the plan up to date is crucial.
A simple, easy to understand member journey with well-designed communications, is important to improve member engagement and help ensure members get value from their pension. Technology has a role to play here: tools that help members understand their overall financial wealth and plan for their retirement can add real value.
And last but not least, a simple yet sophisticated default strategy and range of fund options should help deliver better outcomes to members.
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