Kim North Best Advice
My adviser is recommending that we change the basis of my company pension plan to put it under a master trust? Why is he doing this and is it a good idea?
The two main ways that a pension can be set up is either through a contract- based arrangement or the assets are held under a master trust.
Traditionally, pension providers have set up pensions under a deed poll (or board resolution in Scotland). These are contract-based schemes such as group personal pensions, stakeholder schemes and group self-invested personal pensions.
There is no need to have any trustees in place for contract schemes and the schemes are not subject to the Pensions Act requirements while occupational schemes are subject to the rules.
A master trust is a multi-employer occupational pension scheme where each employer has its own, effectively ringfenced, scheme within the master arrangement. The product provider usually provides the master trust and will do the administration and provide investment services to the trustees.
Master trusts are relatively cost-effective with low charges such as an annual management charge of 0.8 per cent and offer a variety of advantages, including the ability to refund contributions to the employer and employee if the employee leaves within two years.
There is no need to provide all the disclosure information that often just confuses the member of staff as you need to with, say, a GPP. Master trusts also provide more pension governance for their employees.
Product providers often provide a pension registration service at no charge, simplified paperwork on establishment of the scheme and rapid HM Revenue & Customs registration of the scheme and continued maintenance.
However, master trusts do have some downsides that need to be taken into consideration. For example, trustees appointed to the master trust tend to be appointed by the provider of the master trust and there can be what is known as “directed trusts” which means that the product provider or company setting up the master trust can enforce that they are the only fund manager or they may restrict the fund management.
Under a master trust, you, as an employer, need to make sure that you are aware of who is responsible for the selection and review of investments. The provider may not always take responsibility for this function and it could fall upon directors and officers of the employer.
So the issue of moving to an occupational scheme structure and the need to manage and appoint trustees needs to be considered whereas the GPP you currently offer to staff and make employer contrib-utions to does not have the burden of trusteeship.
An incentive for your adviser to suggest a change to a trust-based arrangement may be the fact that the FSA’s retail distribution review, in simple terms, bans indemnified commission from 2012. Pensions set up under a master trust do not fall under the FSA and can therefore continue to pay commission.
Incidentally, the FSA has written to product providers to warn them not to move over to master trust-based pensions in preference to GPPs and the future personal accounts.
The choice is yours, a master trust-based occupational scheme with a defined benefit or a contract-based group pension scheme with a defined contribution.
Kim North (kim@techandtech. co.uk) is director of Technology and Technical