Occupational pension schemes are complex and are regulated by the Pensions Authority for the protection of members, but IORP II raises this governance bar even further. In this insight, we consider in detail an alternative defined contribution pension scheme governance model that many employers are considering.
The status quo
The management of pension plans involves time, resources and money. Ultimate responsibility lies with the trustees, whose fiduciary duty is to act in the interests of the pension scheme members. Employers, as sponsors, will nevertheless have a vested interest in the overall management of the plan and the appointed service providers.
In an IORP II world, we will see the need for more trustee and subcommittee meetings, newly established risk and internal audit functions, own risk assessments, assessments of fitness and probity, and a comprehensive suite of policies and procedures that must be maintained. Employers must also factor in the additional time needed to prepare for supervision and/or intervention by the Pensions Authority as it rolls out its inspections.
The additional level of work—and possibly cost—required to coordinate these services should not be underestimated. This cost will be borne on top of the usual annual compliance costs that come with benefit statements, the trustees' annual report and accounts, audit and ECB reporting, for example.
This begs the question: could an alternative approach to managing pension plans be at least as, if not more, effective? Employers making the decision to transition to a master trust are seeing the change as a means to revisit their pension governance model.
A new (and improved?) governance model
So, what would pension plan management look like in a model where all the regulatory burden is dealt with by a master trust? In brief, very different.
Let's consider some of the key differences:
1. Outsourced regulatory compliance
This is fully outsourced to the master trust trustee board, which is supported by advisors from the master trust founder. Compliance will be overseen by the trustees, and the Pensions Authority will look to regulate master trusts closely as they continue to scale.
2. Reduced regulatory workload
There would be an immediate reduction in the workload as services are bundled through the master trust. For example, there would no longer be a requirement to produce an audited trustee annual report and accounts. Nor would there be ECB reporting requirements or a need to appoint key function holders – all of which would be addressed by the master trust.
3. Monitoring and oversight
This takes on a new light as a newly established pension committee can focus on the performance of the pension arrangement and the benefit it is delivering for employees and pension scheme members. Employers can spend time creating a pension proposition for staff and ensuring that the master trust remains market-competitive.
4. Clear separation
In a master trust framework, there can be a greater division between those providing the advice and those providing the solution. This avoids potential conflicts of interest and allows for a more independent monitoring framework, which can be created through an employer-established, non-statutory pension committee.
The reduced regulatory workload allows for the time invested in supporting pension provision to be focused on the employee experience – ensuring that communication programmes are tailored, that engagement levels are high and that the pension arrangements are delivering the outcomes expected.
There is now an opportunity for employers to challenge the status quo and rethink how their pension plans are managed in the future. In doing so, it could bring about positive change for all stakeholders.
The four key actions to take now
We suggest that employers consider the following four questions in 2022:
1. How are pensions managed today?
Employers should be aware of how their pension plans are managed today and the stakeholders, costs and services involved. This inventory will offer the baseline for comparison with alternative models.
2. What value does this operating model create?
Employers need to rationalise the existing operating model and how each aspect plays its part in delivering a valuable pension proposition. Areas where little value is obtained must be challenged.
3. Could it be improved to deliver a better impact?
We considered an alternative operating model above, where a master trust is adopted. Would this bring greater impact to your pension proposition, or what aspects of the status quo need to be reshaped to create value?
4. Could pensions be managed differently?
Pension savings are a significant portion of an individual's personal wealth and given their complexity, they often rely on their employer for support. Employers who rethink their pension delivery model have the opportunity to maximise its impact for employees.
We are here to help you
The occupational pension scheme landscape is evolving and making the right decisions for your organisation can be a challenge. Now is the time to challenge the status quo and reimagine how pensions can be delivered. We are ready to help you as you face the future. Contact us today.
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