Personal Pension  

The good, the bad and the ugly

Master trust pension schemes have been around for decades, providing both defined benefit (DB) and defined contribution (DC) pensions for employees of all different types of employers.

Why then have they been receiving so much attention recently, much of it adverse, with the Pensions Regulator recently announcing that addressing the quality and viability of these schemes will be a top priority for them over the next three years?

The answer to this question lies in the constitution of master trust pension schemes and their increasing popularity following the advent of auto-enrolment into workplace pensions in 2012.

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What is a master trust pension scheme?

The Pension Regulator’s definition of a master trust scheme is: “An occupational trust-based pension scheme established by declaration of trust which is or has been promoted to provide benefits to members who are staff of employers which are not connected and where each employer group is not included in a separate section with its own trustees.”

These vehicles have increased in popularity since the auto-enrolment workplace pension duties were introduced in 2012. Starting from October of that year, employers have been required to provide their employees with a qualifying pension scheme and to contribute to the scheme.

For many employers, master trusts, have been the auto-enrolment scheme of choice for a number of reasons. One consideration has been the ability for employers to get a refund for contributions for employees who left them with less than two years’ service. This option has never been possible for personal pension providers.

Short service refunds were, however, abolished last October and yet the popularity of master trusts has not diminished. So, employers are not just choosing them so they can ‘get their money back’.

Other reasons for the popularity of master trusts are that:

They save employers the time and expense of setting up their own trust based pension scheme.

The charges can compare very well with the main personal pension providers.

Many schemes are aimed at smaller employers that pension providers are not actively marketing to.

Nest (the National Savings Employment Trust) set up to help employers with their auto-enrolment duties is a master trust scheme.

It may seem so far so good, but master trusts have been the subject of bad press.

As observed by The Pensions Regulator in its 2016 Corporate Plan, the roll-out of auto-enrolment has driven a substantial rise in DC pension scheme membership and an increase in newly created master trusts, some of which now have over 1m members.

Consequently, members are increasingly in a handful of schemes – 55 per cent of DC scheme members are in the four largest master trusts and there are 69 much smaller open master trust schemes. The regulator’s research shows that large schemes benefit from economies of scale, tend to be better governed, have better member communications, and provide better value for members.

However, a major failure of a large master trust, having no sponsoring employer to support it, could result in members being forced to meet the administration costs as a result of, according to the Regulator, “its disorderly exit from the market”.