Pharmaceutical company Bayer has closed the DC section of its pension plan and transferred members to a mastertrust, a move experts say has become more widespread in recent years.
Fifty-five per cent of trustees and employers interviewed in 2015 said they planned to use mastertrusts for at least some part of their DC workforce within the next five years, according to an Aon Hewitt survey.
From a trustee perspective you’d have to sit back and say, well, how good are we? Do we actually think that our governance is better than the mastertrust governance?
Andy Cheseldine, Capital Cranfield Trustees
In June last year, following a consultation, Bayer closed the DC section of its Bayer Group Pension Plan, which had a total of 3,266 defined benefit members and 1,819 DC members at March 2016.
Employees were offered the opportunity to contribute to a new mastertrust arrangement, to which their retirement accounts were transferred.
Since then, the board of trustee directors has been reduced from nine to six, according to a 2017 correspondence sent to members of its DB scheme.
A number of schemes made similar moves recently, including bathroom and kitchen products company Norcros and the FKI Group Pension Plan.
Improvements for members
Mark Harvey, human resources business partner at Bayer, said the company believed that the mastertrust would offer members a number of improvements that were not available under the previous arrangements.
One of the reasons was to give members access to the pension freedoms that came into force from April 2015. Bayer also said it gave employees a wider range of funds in which to invest, and “lower management charges for the default investment strategy and competitive charges overall”.
“The company worked alongside the existing trustee board to ensure that members were not disadvantaged by the proposed changes and then engaged with members of the pension plan in a formal consultation process during the first quarter of 2016,” said Harvey.
An internal Bayer governance committee was established to monitor the operation and performance of the new mastertrust.
Pay attention to selecting the right provider
Lee Hollingworth, head of DC consulting at Hymans Robertson, said that while moving to a mastertrust is by no means a new concept, “it has been an increasing trend, particularly over the last 12 to 18 months”.
There are a number of drivers behind sponsors and trustees switching to a mastertrust, including “the increased regulatory burden that’s being put on trust-based schemes” and the cost of that compliance, he said.
Source: Aon Hewitt
He added that employers are often looking to outsource to a third party “where it’s a one-stop-shop, all the costs are paid for by the member [and] all the communication is delivered by the provider”.
Hollingworth noted the current size of the mastertrust market, and how that affects provider selection. “We do expect the market to slim down quite substantially over the next five years, which makes getting the right choice of provider absolutely critical,” he stressed.
“Doing the right due diligence on their offer and their commitment to the market is important,” he said. “Another element will be the communications support… particularly the support at retirement that’s being offered to members,” Hollingworth added.
Assessing DC governance
Investment is also a key part of the selection process. Hollingworth stressed the importance of ensuring that the mastertrust has the right funds available to construct an appropriate default fund that can deliver the returns members need.
Governance aspects also tend to play a significant part in the decision to move to a mastertrust. Andy Cheseldine, client director at independent trustee company Capital Cranfield, said: “From a trustee perspective… you’d have to sit back and say, well, how good are we? Do we actually think that our governance is better than the mastertrust governance?”
He noted that some trustees do not commit enough time to DC governance, particularly if they are also looking after a DB scheme. While some trustee boards are very good at committing time to DC, “quite often the DC part of trustee meetings are 10 minutes at the end”, he said.
The DC charge cap can also put pressure on trustees. Jinesh Patel, senior vice-president, investment consulting at Redington, said: "For trustees of smaller pension schemes, the operational costs of running their single employer trust arrangement may be too high and the regulatory burden may be too cumbersome. As a result, outsourcing and transferring assets to a mastertrust could possibly be the best solution for trustees."
However, Patel noted that for employers of contract-based pension arrangements, “while a mastertrust does have some positives, it may not be the right pensions vehicle for all”, such as people that require greater investment choice and flexibility.
