Should your DC scheme move to a mastertrust?

Mastertrust memberships have almost quadrupled during the past three years, from around two million in 2014 to nearly seven million in 2016, according to figures from the Office for National Statistics. 

These multi-employer defined contribution schemes offer members a combination of professional governance and administration, consolidation of legacy arrangements, increased engagement, flexibility and improved communication.

Research commissioned by the Pensions Regulator has also shown that mastertrusts tend to be the most likely to meet the expectations within the pensions watchdog’s DC code. 

The introduction of an authorisation and supervision regime, as highlighted in the Pension Schemes Act 2017, could lead to consolidation in the marketplace.

Nevertheless, mastertrusts will remain a prominent feature of the DC pensions landscape and are well placed to take the lead when it comes to innovation in areas such as decumulation.

Whether they are suitable for an employer will depend on that employer’s priorities and philosophy.

Easing time and cost pressures

A key driver behind the growth of mastertrusts has been auto-enrolment, and many of the smaller schemes that have emerged since 2012, with the same initial intention in mind, have also been mastertrusts.

The reasoning behind the choice of legal structure may be influenced by the fact that a mastertrust is easier to establish than a group personal pension.

However, if you already have a GPP, then fundamentally there is little difference between your current arrangement and a mastertrust.

Many large companies offer both, and often they sit on the same administration platform. That said, one of the main advantages of a mastertrust, or any trust-based scheme, is that it is easier to make investment choices and enact decisions within a trust.

Contract schemes are, essentially, a collection of individual contracts, so making wholesale changes to satisfy strategic decisions, particularly around matters such as investment choices, can be clunky.

If you are in an own-trust arrangement, then moving to a mastertrust could be seen as a way to alleviate pressure on time and costs associated with trustee fiduciary duties.

It preserves some of the paternalism and governance of a trust arrangement, but offloads the bulk of the regulatory and legal burden to the mastertrust provider.

The employer would lose much of the decision-making power at member level in terms of default investment design, contribution collection method, member communication and scheme design.

Supervision and security are two other factors to consider and, for mastertrusts, these will change under the new Pension Schemes Act.

There is also the commercial aspect to consider. GPP providers can be pickier, declining to offer terms for ‘poor quality’ schemes.

On the other hand, mastertrusts often accept entire populations without stipulation. For employers looking for a one-size-fits-all solution, mastertrusts can be attractive.

Prioritise 

Mastertrusts are often offered by employee benefit companies wanting to provide a packaged consulting and product solution.

The upside is that consulting, governance, investment and product are all in one place. Downsides, however, can be uncompetitive charges, short-track record, lack of buying power in the market and rudimentary product capability.

So, should your DC scheme move to a mastertrust? Ultimately, it depends on your priorities.

If you are running an own-trust DC scheme and want less direct regulatory responsibility, but like the formality of a trust structure, then consider a move.

If you are running a GPP there is very little practical difference to the member or to the impositions on the employer. Neither mastertrusts nor GPPs cater for scheme-level governance particularly well.

There are pros and cons with each structure and mastertrusts are not necessarily superior in all circumstances.

The key to choosing a suitable outfit for your organisation is to start by defining what is important for both employees and employer, and prioritise your needs accordingly.  

John Wilson is head of technical, and Stephen Coates is principal, both at JLT Employee Benefits