The future of master trusts in Ireland

18 December, 2020

The pensions authority believes that a smaller number of larger pension schemes would deliver better outcomes for pension scheme members. A master trust is a potential solution for achieving this, although the market is still in its infancy in Ireland when compared to other markets like the UK.

The pensions authority released its initial observations on the current master trusts in the Irish market recently. These will need careful consideration from all stakeholders including trustees, master trust founders, employers and the pensions authority.

We are at an important juncture in the future of defined contribution pension schemes in Ireland. The necessary stepping stones must be carefully laid to ensure a sustainable master trust market that serves its purpose.

A aerial photo of Saint Stephen's Green park on the south side of Dublin city centre.

Master trusts in the UK

The UK experience of master trusts is of interest, due to their similar pension regulation and legal structures. The introduction of auto-enrolment in 2012 led to significant growth in the master trust market. Between 2010 and 2018 the market grew to £16 billion assets under management, with 90 master trust providers and 10 million members.

2018 saw the introduction of a Code of Practice from the Pensions regulator for the authorisation and supervision of master trusts. From 1 October 2018, all new master trusts in the UK must make an application to be authorised by the Pensions regulator. Any master trusts operating at that time were given until 31 March 2019 to complete the authorisation process. If they failed to be authorised, the master trust would be required to wind up.

There are five criteria to authorisation:

  1. Fit and proper individuals (including trustees, scheme funder, scheme strategist and others)
  2. Robust systems and processes
  3. A continuity strategy
  4. Scheme funder: must be a body corporate or partnership and only carry out activities relating directly to master trusts
  5. Financial sustainability

This change in legislation and authorisation process was a trigger for more than half of the master trusts already operating to leave the market, leaving 37 authorised master trusts at the end of the transition period. This has since increased by one, to 38 authorised master trusts with more than 16 million savers and £38.5 billion assets under management. The most significant is National Employment Savings Trust (NEST), with more than nine million members. NEST has an obligation to accept all sizes of employers whereas other UK master trust providers can be more selective.

By 2026 the expectation is that this market may grow to £400 billion, representing circa one-third of the UK defined contribution market. The master trust regime is a key pillar of pension provision in the UK.

The master trust market in Ireland

July 2018 saw a consultation paper issued by the pensions authority on the regulation of master trusts. Its response to this was published in June 2019, setting out its view of the obligations on master trusts over and above those of a standalone Trust-based scheme following the transposition of the IORP II Directive. These requirements included:

  1. Trustees being structured as a Designated Activity Company (DAC) with a minimum of two directors and the chair being independent
  2. A continuity plan demonstrating the viability of the master trust
  3. Sufficient capital to cover running costs and wind up without affecting member funds
  4. Own risk assessment every three years
  5. Conflicts of interest protocols, particularly around the relationship between the master trust provider and the trustees
  6. A written policy for engagement with members and employers
  7. Transparent charging
  8. Trustee consent on marketing material
  9. Reporting requirements to the pensions authority

There are clear parallels with the criteria in the UK for master trust authorisation.

During 2020 the pensions authority engaged with a number of existing master trust providers in the Irish market and latterly released a statement on its findings. This pointed to some concerns around:

  1. The separation of roles between the master trust provider and trustees, as well as wider conflicts of interest
  2. Implementing measures contained in IORP II
  3. Business continuity plans
  4. Informed trustee discussions on key issues

In terms of the scale of the current market, we understand that there are currently seven master trust providers in the Irish market with €1.5-€2 billion assets under management.

There has been a growing appetite from many employers in the UK to use master trusts as their employee pension vehicle, offering an efficient way to meet the regulatory requirements associated with pension provision and allowing them to focus on the benefits of retirement savings as a means of employee reward. Anecdotally in Ireland, many employers also see the merits of a master trust for similar reasons.

The potential future of the market in Ireland

Scenario 1: Development of master trusts loses pace

The pension authority's proposed requirements are clearly challenging to meet. A master trust provider would be required to place their business in the hands of trustees who are fully independent of the provider. This is clearly a difficult commercial proposition to sign up to, particularly given the investment required to develop a master trust that will meet the wider requirements of the Irish market. This will lead to a pause for thought at least, and may cause providers to be more cautious around how their master trust proposition develops.

For employers who would see a master trust as the appropriate vehicle to provide pensions to their staff post the implementation of IORP II, this scenario potentially creates a lack of clarity around how to proceed from here.

Scenario 2: Alternative pension vehicles gain popularity

In an environment where master trusts are paused and employers consider the impact of IORP II on their existing standalone Trust based scheme too onerous, an alternative is to provide pension benefits through a contract-based PRSA arrangement. PRSA arrangements fall outside of the IORP II regime, but having been introduced almost 20 years ago have not gained significant traction as a solution for company pension arrangements. This reflects primarily the lack of trustee oversight, limitations on contributions that can be paid tax-effectively and their relatively higher cost structure.

PRSAs would likely not be seen as an appropriate solution by many employers.

Scenario 3: A robust regime prevails

Ultimately, we must remember the purpose of master trusts is to improve quality, lower risk and deliver better value for money. To achieve this, and ensure pension scheme consolidation is executed for these reasons, we will need workable legislation, regulations and guidance which in their entirety are proportional and present a robust framework for the future. This means a timely transposition of IORP II, clarity on master trust regulation and oversight and simplified bulk transfer regulations.

When set against the potential alternatives, there is clear benefit to a master trust regime that is fit for purpose. It offers a means for Employers to continue to provide pension benefits to the employees without having to directly address the regulatory overhead that IORP II will bring.

Actions for employers to consider now

On the assumption that scenario 3 does come to fruition, there are a number of actions employers should consider.

  1. IORP II impact analysis: this will involve assessing the necessary structural changes and associated cost implications to comply with the new IORP II regulations. Trustees will typically be working on this with their existing pension providers but employers need to be aware of the outcomes and the knock on impact for its business operations.
  2. Suitability assessment of existing pension arrangements: in light of 1 above and the changes that may be required to comply with IORP II, it will be important to consider the alternative options (including master trusts) to determine if there may be a more sustainable alternative for future pension provision. This up front due diligence is critical to deliver a longer term return on investment.
  3. Change management plan: changes will be required, be it to the existing arrangements or with a view to a new pension solution. Both will require a well structured implementation plan to ensure a smooth transition.

We are here to help you

The master trust market in Ireland is still in its infancy. However, with greater clarity on what IORP II will mean for Irish pension schemes and well balanced requirements for master trusts, the market is expected to grow. With extensive knowledge of the Irish pension market and each of the master trust providers, we can support employers to decipher what IORP II means for them in the long-term and help identify the most suitable pension structures for its people. Contact us today.

Contact us

Munro O'Dwyer

Partner, PwC Ireland (Republic of)

Tel: +353 1 792 8708

Anna Kinsella

Director, PwC Ireland (Republic of)

Tel: +353 1 792 6171

Ross Mitchell

Director, PwC Ireland (Republic of)

Tel: +353 1 792 5122

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