Are Master Trusts a pensions panacea?

08 July, 2020

New terminology has been introduced into the Irish pensions lexicon: the Master Trust. A cursory glance of the websites and communications from the main pension administration providers in the Irish market suggests that Master Trusts offer an optimal way to provide pension benefits into the future. This enthusiasm is supported by the trajectory in the UK where in 2010, some 200,000 people were saving for their retirement in a Master Trust, a number that has climbed to 13.9 million members in 2019.

What’s the attraction of Master Trusts?  

There are a mixture of factors pulling employers away from running their own pension scheme and pushing them towards a Master Trust solution.  One of these is the implementation of the IORPS II Directive which is due imminently and will likely increase costs and risks for those managing pension schemes.  

The emergence of Master Trusts has a simple overarching objective of presenting a better value for money choice for all stakeholders.    

Choosing a suitable pension design and legal structure within which the pension vehicle operates is a significant decision for organisations. It has ramifications for an organisation’s future operating expenses and typically cannot be unravelled in a simple manner. 

For this reason, due care should be taken in making the correct choice and at the right time.    

What is a Master Trust?

A Master Trust is effectively a defined contribution pension arrangement which multiple employers (who do not have to be related in any way) can participate in. In simple terms, each employer has its own section within the pension arrangement which is managed on behalf of its members by a single Trustee body who will be independent of each employer. The administration, governance, investment and communication aspects will all be controlled by the Master Trust provider.      

Should I move to a Master Trust?

Whilst there is complete logic as to why Master Trusts have been established, primarily to achieve cost savings, reduce risk and improve quality; deciding to move your current defined contribution pension arrangement into a Master Trust may not be as simple and clear cut a choice as one might think. In fact, by doing so without due consideration, this could present difficulties in the future if it no longer becomes fit for purpose.     

By moving to a Master Trust, an employer and its existing Trustee body is effectively outsourcing control and ownership of its pension scheme to the provider of the Master Trust and the independent Trustee body. This warrants careful due diligence like any other outsourcing arrangement would.

As an example, the majority of Master Trusts will be set up by a particular pension provider, and this will create the potential for conflict of interest as the provider is, in effect, paying for the board of trustees.

The Pensions Authority’s view is that Master Trusts cannot be bound to a particular service provider which will mitigate this issue, assuming credible and independent Boards of Trustees. This creates an interesting market dynamic as the quality and independence of Trustee boards will become a key distinguishing factor in the selection of any Master Trust provider.

Steps for assessing options

There are a number of steps which employers must consider if they are presented with the option of moving to a Master Trust:

  1. Define selection criteria
    It is crucial that employers take time to consider their pension philosophy in relation to their overall reward structure, the full array of options available to them and the criteria against which they will assess these options.
  2. The status quo
    What existing arrangements (open and closed) are in place and is there a clear view of the respective operating costs and risks?  Is the status quo no longer fit for purpose?  Is there potential for reduced risk and cost and improved quality across the existing arrangements?
  3. Alternatives to the Master Trust
    Has proper consideration been given to the potential alternatives to a Master Trust solution?
  4. Go / No-go decision
    Based on the assessment criteria and a full analysis of the current and alternative options, does a Master Trust solution still make sense? What is the payback period given some of the practical considerations which are outlined below?

Practical considerations

In the event that the outcome of step four above is a Go decision, there still remains some practical aspects for the employer to consider. These include:

  1. Which Master Trust is suitable?
    There are a number of Master Trusts in the Irish marketplace, each of which have their own differentiating factors and who continue to invest in the overall proposition. More will come on stream once the bespoke regulations to deal with Master Trusts are introduced.
  2. Who do we move to the Master Trust?
    Will it be only for current employees or will former employees with pension benefits be transferred across also?  The requirements for moving members to a Master Trust are set out under the Bulk Transfer Regulations. These impose requirements on trustees around the information to be provided to members when carrying out a bulk transfer. What subsequently happens at the point of leaving employment and/or retirement for those members who move across should also be considered. 
  3. What do we do with what is left?
    If everyone is transferred to the Master Trust under existing regulations there will be a requirement to wind up the existing pension plan(s) which will have cost implications that need to be factored into the analysis. 
  4. Stakeholder engagement
    A carefully planned and executed communications strategy will be important in order to ensure a smooth and successful transition.  Existing Trustee Boards fulfil a valuable role linking a pension arrangement and an organisation, and replacing this link will be important.
  5. Timing
    Equally important will be when is the right time to do this.  Master Trusts are in their relative infancy in Ireland and the legislation is still to be enacted so deferring may be an option depending on the employer’s appetite.  

In addition to the communication of the change, any move to a Master Trust will require an implementation project plan. 

Among other things, this plan should consider the transition of:

  • member records,
  • assets
  • investment choices

as well as the legal work associated with implementing the changes.

A leap of faith or a rational choice?

We expect that many organisations will explore a Master Trust solution in the near term. A high proportion of these organisations will conclude that a Master Trust is their optimal choice. With the growth in the market that will result, energies will increasingly turn to navigating the range of Master Trust options in order to ensure employers are selecting the best fit for its business and workforce.  

Taking a leap of faith with a long-term pension solution for your workforce can have significant strategic, financial, operational, compliance and reputational risks which may be very difficult to unravel. A carefully considered, evidence based decision will reap long-term benefit.

Contact us

Munro O'Dwyer

Partner, PwC Ireland (Republic of)

Tel: +353 1 792 8708

Ross Mitchell

Director, PwC Ireland (Republic of)

Tel: +353 1 792 5122

Anna Kinsella

Director, PwC Ireland (Republic of)

Tel: +353 1 792 6171

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