Do all roads lead to Master Trusts?
24 May 2018 - Estimated reading time: 2 minutes
Since the introduction of auto-enrolment in 2012, the rise in the use of Master Trusts has been an irresistible force. As a consultant we’ve seen Masters Trusts develop from a relatively niche option serving the needs of smaller employers, to now being viewed as the only game in town. Do all roads lead to Master Trust? While this may be true for many employers it is also true to say that other models, such as an employer trust scheme still have a role to play in the right circumstances. It’s not black and white.
Auto-enrolment aside, it is undeniable that the pace of employer based trust schemes moving to Master Trusts has accelerated over the last two years. But why? This can be attributed to the following three reasons:
- Cost: Many employers are now having to write a cheque to pay for the scheme running costs for the first time. This is due to the abolition of short services refunds in 2015.
- Regulation: Increased regulatory responsibility – the DC code of conduct, including the need for an annual chair statement and VFM assessment.
- Contribution rates: Auto-enrolment moves into a steady state of 8% from April 2019. Pensions will become less of a differentiator and more of a hygiene factor unless the employer has a budget to offer higher contributions than the statutory minimum. The effect of this is that employers are seeking to outsource the pension benefit to a third party and focus their efforts on other benefits.
These are all valid reasons to consider a change, but I would argue that while Master Trusts can often be a good option, employers shouldn’t always assume they are the only option. As I said the answer isn’t always black and white and sometimes remaining in a trust based arrangement can be the better option.
How you ask? Let me address the previous three reasons to explain:
Cost: Shifting to a Master Trust can save costs, but the same outcome can be achieved by simply bundling the service delivery to a third party – a bundled trust solution.
Regulation: Increased regulatory responsibilities – the truth is that by taking a pragmatic approach trustees can still meet their regulatory responsibility without incurring undue cost or risk. In addition, in our experience most large employers will establish their own governance committee to run alongside the Master Trust thereby negating the benefit.
Contribution rates: While it may be harder to differentiate a scheme through contributions, the fact is two-thirds of employees are not on track to retire comfortably*. Employers can differentiate their scheme through a moderate additional investment designed to improve engagement.
I think we will continue to see a rise is use of Master Trusts, and that’s no bad thing, yet they are definitely not the only option, a trust based approach can often be the best way forward for employers too. So all roads don’t lead to Master Trusts, there is a fork, where you’ll need to consider carefully which option works best for you and your scheme members.
Join our ‘Assessing the future of DC’ breakfast seminar on Wednesday the 11 July in London, where we will discuss the merits of Master Trusts and a trust based approach in more detail. You can register for the event here.
*Hymans Robertson GO data 2018