Master builder

November Retirement Strategy

Master trusts claim to offer small employers access to the uplands of trust-based occupational pensions but at the low costs associated with contract-based group personal pensions or stakeholders.

These master trusts are trust-based occupational schemes that seek to generate economies of scale by operating on a multi-employer basis. There will be a product provider behind the trust which has set it up and installed a group of trustees to run it.

The provider will also supply admin and investment services to the trustees. Individual employers join the scheme through a deed of adherence and each employer has their own section to avoid any risk of cross-contamination were another employer within the trust to default in any way.

From the employee’s perspective, a master trust-based scheme will look and feel much more like an employer’s pension scheme than a GPP can - the joining documentation is simpler and more intuitive and there are none of those detailed key feature or policy documents to bamboozle the staff with. But master trusts fall well short of the flexibility that a traditional occupational scheme offers.

By adhering to a central trust deed, an individual employer is signing up to the pensions equivalent of the Treaty of Lisbon. A central governing body somewhere else is going to be setting the rules and any idea that the employer has the flexibility to make their own choices on, say, the appointment of administrators or accountants will prove to be false.

As is so often the way in pensions, it is the perverse actions of our UK legislators and regulators that are driving the rush to master trusts.

uring the consultations on the Turner proposals for auto-enrolment, employer bodies pushed hard but without any real success for waiting periods for new staff. Traditionally, it has been a feature of employer-sponsored pensions that new staff had to earn their spurs and successfully complete a period of service before they could join. The employer pension contribution was reserved for staff who had proved that they had settled down and were committed to their employer.

But, with very limited exceptions, the new employer duties in 2012 will require all new staff to be auto-enrolled from their first pay day.
By using a master trust, the employer will be able to offer those that leave within two years a refund of contributions. And the trust can be structured so that refund is the default choice - if the early leaver does not transfer out to another arrangement, then their membership can be terminated by sending their personal contributions on to their bank account.

The employer gets a refund of their contributions too. It is almost as good as running a waiting period and will be a big saving for employers

with high staff turn-over. This can not be done with a GPP and the personal accounts scheme, which could offer this facility being trust based, has already written its rules to preclude refunds.

Another angle favouring master trusts is that, being occupational schemes, the FSA has left them outside the RDR. This could help IFAs struggling with the econ- omics of servicing pension provision to small employers.

I don’t believe our industry has the capital to return to a world of high initial commission. However, master trusts will not be constrained to a single-charge regime and we may see a wider range of scheme char-ges more closely aligned to the amount and incidence of costs. These could facilitate commission arrangements that we will not see in the RDR-bound GPP and stakeholder market.

The consumer will not be without protection here either. Trustees will have a fiduciary duty to ensure that the scheme operates in their interest and this will include giving them clear information on the pros and cons of transfers or refunds as well as ensuring that scheme charges remain fair and reasonable.

Moreover, the Government has reserved powers under the Pensions Act to introduce maximum charges for pension schemes being used for auto-enrolment if they see any evidence of market failure.

It is through their intransigence on issues such as waiting periods and applying rules equally to both trust-based and contract-based schemes that the Government and regulators have created an arbitrage opportunity for master trusts. In the same way as water flows downhill, employers seeking cost savings will seek out such arbitrage.

Adrian Boulding Pensions strategy director Legal & General

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