Panellists discuss recent competitors to NEST, and the pros and cons of a master trust arrangement.
Martin Palmer: This is a fascinating question. Master trusts are an excellent way of getting top-quality governance and advice, but if an employer is simply looking at a master trust as a way of recouping contributions for leavers, then forthcoming legislation is likely to remove the ability for trusts to make refunds of contributions in the first two years.
Understandably, we are actively looking at the commercial opportunities around this, but we will not enter the market if it is not in the interest of our customer base.
However, we do already have the capability to link our existing proposition with master trust arrangements that are established by distributors.
What are the pros and cons of implementing a master trust arrangement?
Dave Hodges: The attractions of master trusts are that they are a good middle ground – providing the good governance of a trust-based structure and a hands-off approach for employers.
Larger employers can create their own bespoke investment strategies and they should be cheaper than a standalone trust structure as the costs are spread over multiple employers.
However, the main problem with master trusts is the very fact that they sit in the middle of the cost and flexibility scale.
Most employers are polarised in their views – they either wish to strongly govern the pension scheme in which case the employers own trust structure is attractive or they are looking for the lowest cost arms length solution, for which a contract-based solution is an obvious choice.
To put this into perspective, a 6,000 employee client of Zurich, who have recently moved from a trust-based DC scheme to a contract-based scheme, estimates they will save up to £250,000 per year in costs as a result of no longer having to support a trustee structure.
For those employers looking to offset the cost of auto-enrolment, a lower-cost option will be more attractive.
Martin Palmer: There are obviously huge differences between trust-based and contract-based schemes and that is why we have seen Paul Johnson, in his making auto-enrolment work report, conclude that legal changes are necessary to level the playing field between the two regulatory structures.
For me, one of the positives of a master trust is that it demonstrates expertise to the market place and gives access to excellent trustees.
Through the governance structures in place, it reduces risk and encourages a very responsible attitude to the members’ money invested.
It also provides a potentially efficient solution for scheme leavers where employers are keen to remove any subsidies they are providing to their ex-employees.
But there are also definite negatives: a master trust is a half-way house – the trustees running it are not part of the business or scheme, so any failures or disappointing returns will have no direct effect on their pockets.
In addition, the trustees will need to balance the requirements of a range of different schemes.
They will also incur additional costs when compared with contract-based schemes.
