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.
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.
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.
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.
There are a number of steps which employers must consider if they are presented with the option of moving to a Master Trust:
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:
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:
as well as the legal work associated with implementing the changes.
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.