Master trusts have their downsides, but can certainly be worth considering
Are you, like many employers, feeling that it’s time to reconsider your pension provider now that you have passed your auto-enrolment staging date?
Perhaps you have become disillusioned with the investment performance or service standards you have been experiencing or by the governance responsibilities you have found yourself grappling with? Or do the costs you are paying seem too high?
If so, Chase de Vere can help you review your current pension arrangements and possibly highlight other potentially more suitable options. New providers are coming on board all the time and, empowered by the benefits of newer technology, are bringing with them ever-more innovative and cost-effective formats.
The actual type of pension scheme structure you are offering may also not be the most suitable for your workforce. It could be that you made a rushed decision at outset because of the time pressures involved with initially complying with auto-enrolment.
You may, for example, have plumped for a trust-based occupational scheme when a contract-based group personal pension (GPP) scheme may be more appropriate to your needs going forward.
Another option rarely out of the news nowadays is the master trust. Indeed, earlier this month the 8,800-member Railways Pension Scheme’s Industry-Wide Defined Contribution (IWDC) Section became the 12th one to be authorised by The Pensions Regulator (TPR).
A master trust is essentially a multi-employer occupational pension scheme within which each employer has its own section. It can provide a superior governance function and greater investment flexibility and, by realising economies of scale, it tends to have lower operating costs than a single-employer scheme.
It also aims to provide employers with a greater level of simplicity than a single-employer trust-based scheme, which needs its own trust deed, rules, and trustees.
Under the traditional trust-based approach the majority of members of the trustee board are representatives of the employer, which has to set up the scheme. A master trust, on the other hand, is normally set up by the provider – which is often an insurance company – and uses independent trustees.
Although the major governance and regulatory calls are made by the master trust’s trustees, each participating employer can retain the ability to make some of its own decisions, most notably around contribution levels.
According to figures from The Pensions Regulator for 2017/18 relating to firms with over 30 staff, master trusts were used by around 53,000 employers, compared to 33,000 who used GPP schemes. (1*)
But master trusts are not entirely without their downsides. Some, for example, have more complex charging structures than GPP schemes – which employ a flat percentage annual management charge. (1*)
Master trusts, which tend to use a ‘net pay’ arrangement (where pension deductions are taken before Income Tax), can also result in those earning below the £12,500 per annum tax-free personal allowance missing out on tax relief. But this is not an issue with GPP schemes because members receive tax relief at source (which requires net contributions). (1*)
Furthermore, perhaps the most commonly-cited reservation of all about master trusts is that, because the boards of trustees tend to be set up by the pension provider, it can create potential conflicts of interests – because providers can be perceived as effectively paying for the trustees. (2*)
But these disadvantages can be outweighed by the ability of master trusts to offer superior governance and access to a better range of investment funds, and we certainly do recommend them for some clients.
The choice between master trusts and GPP schemes can in fact often be such a close-run thing that factors such as the age profile of the scheme membership and the level of staff turnover can tip the balance towards one or the other. (2*)
Additionally, even when master trusts are considered the best option, it is crucial to select the right provider, as there are some subtle but importance differences between them. Such decisions should therefore be made in conjunction with expert advice.