Pensions World

Ken Anderson, Xafinity, explains how a well structured master trust can give high levels of support and protection to members.

The Pensions Regulator (TPR) has stated that correctly structured master trust arrangements have the potential to deliver good member outcomes very effectively. But what does “correctly structured” mean and are all master trusts the same?

In a recent review, TPR identified six elements which it believes are necessary to support members of defined contribution (DC) plans in achieving an adequate income in retirement (Figure).

All pension schemes, trust or contract based (eg, group personal pensions, self-invested personal pensions and stakeholder plans), can provide members with effective support. However, to achieve this, employers with contract based plans typically have to establish and manage governance committees, similar to trustee boards. While many employers value the paternalistic approach and control that this approach engenders, others find the cost and management time prohibitive.

Auto-enrolment

The Department for Work and Pensions has stated that employers should ensure that the default investment option into which members will be auto-enrolled, whether it be contract or trust based, remains appropriate from a governance, design, review and communication perspective.

Support and protection

Master trusts are multi-employer occupational pension schemes that can be used by many employers that are not otherwise related. They are governed by trustees and subject to the same legislative and compliance framework that all trust based schemes are affording members high degrees of support and protection.

Master trust arrangements, such as the National Employment Savings Trust (Nest) and the Xafinity Pension Trust, can deliver good member outcomes very effectively because economies of scale enable high levels of member support to be provided at a much lower cost than would otherwise be the case.

Compliance responsibilities

There is no such thing as an “average” or “typical” master trust. Each differs in the level of support that they afford members and the extent to which they pass the compliance responsibility to the participating employers.

There are two broad categories of master trust: those that are “governance light” which place much of the compliance responsibility on the participating employer and, conversely, those that address all of the governance responsibilities on an employer’s behalf.

Lightly governed: A number of master trusts require the participating employer to establish, manage and be responsible for governance committees. In essence, the participating employer retains the legal and compliance responsibility for such aspects as investments, communications and retirement support. Some are “governed” by trustees who are employed by the master trust provider, raising questions as to their independence and how strongly or objectively they review and monitor the services provided to members.

Highly governed: Nest and the Xafinity Pension Trust are examples of well governed arrangements requiring little input from employers. They are both governed by professional trustees, independent of all service providers, avoiding conflicts of interest and ensuring high levels of objective governance to support members to make appropriate investment, contribution and retirement decisions.

The Xafinity Pension Trust is the only master trust to have been awarded the Pension Quality Mark in recognition of its high levels of governance, communications and member support.

The importance of quality

Master trusts vary in relation to their contract terms and conditions. For example, Nest imposes a contribution limit more than 90% lower than other arrangements and is also the only arrangement that prohibits transfers into or out of it. However, for certain employers it may offer an appropriate solution.

When selecting a pension arrangement to meet their auto-enrolment requirements, employers should first consider what their corporate objectives are and then consider which vehicle helps them to achieve these. It is important not to lose sight of the importance of quality.