Pensions World

Joanne Segars, chief executive, the National Association of Pension Funds, answers questions from Stephanie Hawthorne, editor, Pensions World

What is a Master Trust?
A Master Trust is where a product provider, normally an insurance company, manages a pension scheme for a number of employers under a single trust arrangement.   

What are the advantages of a Master Trust?
Britain’s pensions landscape is characterised by a large number of small pension schemes. In the UK, the average scheme membership is only 2,600 compared with 10,500 in the Netherlands and 27,000 in Australia.

This makes our pensions much less cost effective and ultimately means higher charges and worse outcomes for the consumer.

Small schemes are less able to capture the scale efficiencies in terms of the cost, investment optimisation and administration available to larger schemes. As a result, they tend to be more expensive than larger schemes. Schemes with more than 50,000 members report costs of around £15–£20 per member while schemes with fewer than 1,000 members report costs of around £150 per member¹. This matters for defined contribution schemes because it is the scheme member who bears the cost and the impact of high costs and charges on their final pension can be significant: someone saving in a large employer’s occupational scheme with a 0.3% annual management charge (AMC) could have a pension worth 30% more than someone facing a 1.5% AMC².

Master Trusts are one way to achieve the scale in pension provision to keep costs low. Instead of having a separate pension scheme for each employer, each governed by a trustee board, the provider, normally an insurer, offers a pension to a number of employers, which is governed by a single trustee board. This helps streamline costs significantly and achieve economies of scale.  
By reaching a critical mass, Master Trusts can provide high quality investment management, administration and communications.  

What are the disadvantages of a Master Trust?
While a Master Trust can drive down costs and provide some benefit to the member from a trustee governance structure, there is a question of whether the trustees are truly independent of the provider. In a traditional trust based scheme, the ultimate sanction for trustees is the ability to replace, for example, their administrator, actuary or investment adviser. However, given the close link between the provider and the trust board, the trustees may not have this ultimate sanction in a Master Trust arrangement. In addition, under current legislation there are no specific requirements as to who can and who cannot set up a Master Trust, leading to potential concerns about quality and member protection.

Will Master Trusts be useful to employers in meeting the auto-enrolment requirements?
They could be and providers are setting them up with auto-enrolment in mind. They will be particularly useful for employers who want more flexibility than that offered by Nest.
 
How do Master Trusts compare with other solutions, ie in terms of cost and flexibility?
A key advantage of Master Trusts is scale, which in turn keeps costs and charges low. But scale can be achieved in other ways.

The NAPF has argued for large, not for profit, multi-employer pension schemes managed by an expert board of trustees whose job it would be to put members first. These “Super Trusts” would be limited in number (to ensure scale is achieved) and would be specifically licensed to operate by the Pensions Regulator to ensure good levels of governance and protection for the member. Nest (the National Employment Savings Trust) is a form of Super Trust arrangement.

Unlike in a Master Trust, the trustee board in a Super Trust would be fully independent of the providers, fund managers and administrators it commissions to operate the scheme.

Modelling undertaken for the NAPF shows that Super Trusts could be offered at low cost, at around 40 basis points. Moreover the advantages of strong governance could ensure that costs remained low and fell further as assets under management grew.

The benefits of lower cost for the consumer would be considerable: someone saving in a large employer’s occupational scheme with a 0.3% AMC could have a pension worth 30% more than someone facing a 1.5% AMC³. The Pensions Regulator and the Department for Work and Pensions have also pointed out that someone paying an AMC of 0.5% may lose 9% of their pension pot to charges while someone paying charges at the stakeholder charge cap level could lose 20% of their fund to charges.

What type of employers should consider using Master Trusts?
Any type of employer could potentially benefit from using a Master Trust or Super Trust arrangement, but they will probably be of most benefit for those looking to provide pensions for the first time.

Which insurance companies (or other firms) offer Master Trusts and which employers have used them?
Some new entrants are operating Super Trust-like schemes. For example, in August 2009 Xafinity launched its Master Trust scheme and last year, Legal and General launched its Master Trust. These schemes display many of the features of Super Trusts. However, in some instances, questions remain about the independence of the governance of the schemes.

It is also likely that new Super Trust-like schemes will be established. A number of providers, often with experience overseas of operating Super Trust-like arrangements, are actively looking to enter the UK market. The long established Danish provider ATP has now launched an auto-enrolment vehicle in the UK under the name “NOW: Pensions”.

What is the future outlook for Master Trusts?
In its response to the discussion paper “Enabling good outcomes in work-based pension provision”, the Pensions Regulator acknowledged the potential benefits of large scale schemes.

It stated that, while some small schemes are well governed and deliver good value to members, “our regulatory experience tells us that many small schemes face challenges in these areas and are less likely to enable members to achieve a good outcome from their savings”.

The Regulator attributed this in part to the fact that such schemes cannot benefit from economies of scale. Moreover, the Regulator did not believe that it was likely that market forces alone would tackle the many risks faced by members of small schemes. 

Sources
¹ The Capita Hartshead Pension Administration Survey, May 2009
² The Pensions Commission, A New Settlement for the Twenty First Century: the Second Report of the Pensions Commission, 2005
³ The Pensions Commission, A New Settlement for the Twenty First Century: the Second Report of the Pensions Commission, 2005