DB mastertrusts grow but funding risks drag on demand

The growth in legacy arrangements saw the Pensions Trust widen its scope beyond the not for profit sector, with the trust opening its doors to private sector schemes last October. 

Continued consolidation and scheme closure in the DB pensions market has seen consultancy Deloitte this week launch a mastertrust targeting mid-sized DB funds, into which it will roll its own £700m staff pension fund.

But while its proponents argue scale will benefit any scheme joiners, some multi-employer structures also bear the risk of ending up covering the liabilities of other employers within the scheme.

Jane Kola, partner at law firm Wragge & Co, said employers should still exercise caution when considering DB mastertrusts with a "celled structure", in which each scheme's liabilities are ring-fenced.

She said there had been previous cases with other multi-employer DB schemes in which the cells had been broken accidentally and she urged trustees and employers to examine how robust those structures really are.  

Trustees will also need to think about an appropriate exit strategy, should they ever want to change to a different provider or bring things back in-house

Darren Philp, B&CE

“If you had a systematic computer error or the allocation of expenses going wrong, that could break the structure,” Kola said. “In DB world that would create a single pool of DB liabilities, which then creates cross-subsidy between employers, which is not what they would want to do.”

Deloitte's mastertrust allows its member schemes to retain their trust boards, contribution rates and investment strategies, and ring-fences their assets while targeting greater buying power on investment management fees. It will also add an independent trustee in an attempt to boost governance oversight.

Mark McClintock, pensions services partner at Deloitte, said: “By identifying those clients that could benefit from our bulk buying power… we can then have further conversations with our managers to drive the cost down further.”

In answer to the question of the protections afforded to each scheme participant, McClintock said the fact the scheme's assets would be segregated meant there would not be any "cross contamination" of liabilities. 

Patrick Bloomfield, partner at consultancy Hymans Robertson, said a potential downside would be a loss of control over administration or investment managers, as well as a different relationship between employer and trustee.

"The biggest drawback for sponsors is the need to engage with a trustee that is seeking standardisation to deliver lower costs," he said.

Darren Philp, director of policy and market engagement at multiemployer scheme B&CE, said many problems with collective DB schemes have been caused by their 'last man standing' structure, in which the remaining employer in the scheme is on the hook for the fund's liabilities. But he added mastertrusts could be relevant for employers looking to pool certain functions to save on costs.

"Even with DB schemes closing to new members or future accrual, these schemes will still need to pay benefits for a long period of time, so it makes sense for them to seek to contain costs and deliver efficiencies," he said. "One way to do it is to share functions through some form of mastertrust arrangement."

Philp said trustees should consider both how a mastertrust could affect scheme members and how much flexibility there would be for trustees to make any changes to the scheme.

"Trustees will also need to think about an appropriate exit strategy, should they ever want to change to a different provider or bring things back in-house," Philp added.