Land of the giants: the rise of the master trust

The move to defined contribution (DC) has been glacial – it always seems to have been there and there is just no stopping it – but auto-enrolment (AE) confirmed it was the way of the future.

In the past, people would choose their preferred structure, often characterised as being trust if you could afford it or contract if you couldn’t or didn’t care. This was rather unfair to contract-based arrangements, but the growing focus of the regulator on the historical governance and performance of DC schemes meant things would have to change.

Regaining trust

A master trust is a multi-employer occupational pension scheme where each employer has its own division within the master arrangement. There is one legal trust and, therefore, one trustee board. The trustee retains decision making independence for each division on things such as investment funds and service providers under a trust wide governance structure. The decisions over benefit and contribution levels typically reside with the employer.

The original trust-based schemes were developed in the 1950s, when several insurance companies set up schemes allowing any number of employers to participate, therefore avoiding the costs associated with an employer running its own trust-based scheme. Master trusts are regaining popularity primarily because they offer a viable route for employers who want the benefit of a governance function, but with generally low operating costs and greater simplicity and expediency than a single employer scheme.

The Pensions Regulator (TPR) has made it very clear the default position of DC – to put in the lowest common denominator and leave it to look after itself, or ‘set and forget’, would no longer be tolerated. After some reflection, its work resulted in the much-vaunted DC principles and latterly the equally-vilified code of conduct, designed to assist employers put in place a decent – and compliant – scheme and to make sure it stayed that way. It sent a shot across the bows of all who had practised ‘governance-lite’ on their DC in the past, warning that sponsors would be brought to book if their schemes did not deliver reasonable outcomes for members.

Of course, this was largely about trust-based schemes, as TPR has no power over contract. However, the OFT’s investigation into contract based schemes has effectively drawn a line in the sand that both forms of DC coverage must be fit for purpose. Increasing regulation of DC has forced many employers to recognise they must up their game as far as trust-based schemes were concerned, says Roger Breeden, a principal at Mercer.

“Some are good, but some spend very little time on their DC arrangements,” he says, “and once you’ve looked at what you could achieve with a master trust, it looks like a more flexible solution than the company’s own trust would be.”

That degree of flexibility has not been lost on the consultancy world who see an opportunity to offer benefit and investment services and advice which are redundant in a contract-based world.

Benefits of scale

Structures placing a trustee above an organisation run by professionals isn’t new either, having been used to good effect in Denmark and the Netherlands since the 1950s and Australia since the 1980s.

In addition to the professional touch, an element many schemes are introducing through independent trustees or delegation to third parties, there is scale to consider, says Rona Train, senior DC consultant at Hymans Robertson.

“At the moment, there are a lot of generally smaller trust-based schemes where the trustees do not have the budget, in terms of time or resources, to effectively manage the scheme,” she says.

“However, many companies still want to ensure their members are well looked after and moving to a master trust solution gives them the best of both worlds. Super trusts have become popular in Australia and have enabled members to benefit from both good governance and economies of scale – things that many schemes in the UK could benefit from.”