Outline
A master trust is a multi-employer, trust-based scheme that differs only from a normal trust-based DC scheme in that it is open to the employees of many employers, the staff of which are all treated equally and follow the same rules.
Often a firm of professional trustees is appointed as sole trustee of the scheme, who will then appoint investment advisers and administrators.
As with any trust, a trust deed is required that sets out the rules of the scheme, including granting authority to the trustees. In all other respects it is very similar to any other group pension scheme.
As the battle for corporate pension arrangements heats up, master trusts are being considered by IFAs as an alternative to group personal pensions (GPP) and other low-cost insurance-based pensions. With GPP providers keen to target employers directly, and commissions on contributions to auto-enrolment pensions now banned, IFAs are looking for more attractive solutions in order to move their business forward as auto-enrolment picks up pace.
Master trusts have been the structure of choice for auto-enrolment pensions ever since Nest, the government-backed scheme, was launched. Itself a master trust governed by a board of independent trustees, the model has been used by other mass market providers NOW Pensions and The People’s Pension.
More recently, in anticipation of the auto-enrolment staging of smaller companies over the coming years, pension administrators and intermediaries have started to dip their toes in the water, looking to expand their client base or simply provide qualifying schemes for their existing clients. Firms such as Carey Pensions and Mercer have also thrown their hats into the ring, announcing master trusts.
Simple or complex?
One of the advantages of the master trust is that, while there are a number of moving parts to consider, the barrier to entry in terms of initial costs to the provider is relatively modest. The legal costs of drafting a master trust deed are not particularly onerous, for instance. The difficulties lie in setting up all the interconnected working relationships: the pensions administration, investment administration (for instance, using a platform), fund ranges, trustees and advisers.
Even if the host provider fulfils one or more of these functions, it is likely that partnerships will need to be formed. As well as increasing the potential for complexity and errors, this multifaceted approach can also add layers of cost to the scheme member.
Cost is an issue because the government is expected to place a total cap on charges in default funds, set to be somewhere between 0.75 and 1 per cent (this has been delayed due to alleged disputes between the DWP and the Treasury over the right figure amid fears that pushing the cap too low will make the market uncompetitive, according to a recent report in the Financial Times.)
So assuming an upper ceiling for a cap on total charges to the investor of 0.75 per cent in a default fund - and given that most of the mainstream auto-enrolment pensions are priced near to 0.5 per cent - putting all the pieces together and making the product profitable and price competitive is no easy feat.
All elements will need to be attractively priced, but it is in the fund management costs where the most significant savings can be made. Passive equities priced at 0.1 per cent can be blended with low charging multi-asset funds to create a diversified, but low cost, default fund. In addition, while the cost of a default fund is tightly controlled, there is nothing to stop IFAs who are making their own master trusts from offering more sophisticated, white labelled fund options which work out more expensive.
Downfall
This is where the mass market auto-enrolment master trusts fall down; they provide only very limited fund options, catering for the most disaffected investor but not more motivated, self-directed investors who tend to be the higher earners.
Typically, higher earners make up a bigger proportion of a small company’s workforce than a larger firm. That means there is scope and potential for interest in a more sophisticated auto-enrolment solution.
The staging date - the deadline for auto-enrolment - for companies with fewer than 50 employers is between August 2015 and April 2017, and while few of these firms will have put their thinking caps on yet, they will need support in order to ensure plans are in place well before the deadline.
The more the merrier?
The irony of the growth in master trusts is that they were being heralded a few years ago as a solution to the problem of scale. By joining forces in multi-employer schemes, company workers can drive administration and other costs down. Contrary to expectations, master trusts have proved extremely popular and have blossomed.
Rather than a handful of large scale master trusts, there are now dozens of competing trusts and there are set to be even more in the coming years. This has prompted some speculation that consolidation is inevitable, but this is not necessarily the case.
By using popular pooled funds as investment vehicles, investment costs are no higher with multiple master trusts than with a handful.
Fund management fees have already been driven down heavily through auto-enrolment. Pensions administration does not scale easily, and while large schemes can cut some costs in terms of communications materials and technology for their members, commercial third-party administrators are already well placed to pass on the cost savings they have achieved through building scale among their own clients.
Similarly, investment administration, if managed through an existing platform, is already streamlined irrespective of the scale of the individual master trusts. Indeed, massive master trusts may well struggle under their own weight, affecting service standards.
The advantage of smaller or even bespoke master trusts is that there can be a stronger relationship between client and provider, lending some degree of comfort all round.
So while the blossoming of the master trust market, and its embrace from the IFA industry, may have confounded some pensions experts, it should be viewed as a welcome development in what otherwise could be a stale and uncompetitive market dominated by just a handful of providers.
