Pensions World

The Regulator may be about to prick the balloon of MasterTrust – but it could remain a viable option for trustees suggests David Bird, Towers Watson

Those of us who are long enough in the tooth to have seen the first coming of MasterTrust are asking themselves what the second coming might bring. Many people have some understanding of what happened in Australia, where MasterTrust now dominates the provision of retirement benefits. There seems to be a growing view in this country that MasterTrust is the next big thing.

In Australia the introduction of compulsory pension saving quickly led to the concentration of retirement provision in the industry wide pension schemes. Over time, those arrangements have graduated to a handful of MasterTrust platforms that provide the investment, administration and employee communication services, largely dealing directly with members and with members meeting most of the charges. The coming of auto-enrolment and the prospect of widespread levelling down have led some to question whether the same could happen in the UK.

At the same time, the provision of pensions is very well established already for one half of private sector employees in the UK. Are we expected to believe that employers will rip all of that up and start again as a result of auto-enrolment and surely it is more likely that the remaining half of private sector employees not in pension provision will gravitate towards Nest?

A range of organisations have begun to offer MasterTrusts. There are investment specialists offering access to sophisticated pension investment approaches that would otherwise be unavailable to smaller pension schemes. And others are focusing on the governance challenges arising from defined contribution (DC) pension provision and seeking to provide a repository for the deferred members of DC pension schemes. We even have pension providers from the first coming of MasterTrust dusting off their original offerings.

Short service refunds

One of the biggest drivers cited behind the potential growth of MasterTrust may prove to be an illusion. For many employers the increasing cost of pension provision that is anticipated as a result of auto-enrolment might be offset to some extent by using an occupational pension scheme. And, if the governance requirements of an occupational DC pension scheme seem undesirable then what could be better than an occupational pension scheme where an employer can still benefit from short service refunds while having all of the advantages of delegated governance associated with a contract based scheme. MasterTrusts could often be the “best of both worlds” solution some are seeking.

Much like the child’s balloon the day after the fun fair, the recent discussion paper from the Pensions Regulator, “Enabling good member outcomes in work-based pension provision”, has rather deflated the MasterTrust balloon with the prospect of an end to short service refunds, at least in their current form.

It is too early to say which way this one will go, but one plausible interpretation is that the more occupational pension arrangements are perceived to be being used primarily as a cost saving measure to counter auto-enrolment, the more likely it is that this so called “regulatory arbitrage” will be addressed.

Where next for MasterTrust?

So if there are no short service refunds, is there any space in the market for MasterTrust? The simple answer is, even putting that aspect aside, several reasons point to a continuing role for MasterTrust.

Mature DC pension schemes invariably have more deferred members than actives even though few have been running for more than ten years. Many DC trustees might conclude that transferring deferred members to a MasterTrust by a compulsory (GN16) transfer may be a good idea. This would allow them to focus on the active members, while the specialist MasterTrust focuses on the needs of the deferred members. There may be challenges about meeting the GN16 requirements, but this may be a better way to go than transfer to an s32a contract or by encouraging voluntary transfers.
A good quality MasterTrust can spread the governance costs across a much wider group of members and so help deliver better outcomes for members at an acceptable cost to the employer, thus differentiating them from other potential employers.

Employers will want to consider it as another option alongside the other existing DC pension approaches (and Nest) when thinking about facing the challenge of providing a competitive and attractive DC pension.

David Bird is a senior consultant at Towers Watson; david.bird@towerswatson.com