Economies of scale make larger trusts masters of the pension universe

Thousands of employers are moving their pension schemes into master trust arrangements due to the new requirements brought in by IORPS II.

“A master trust is, like all other workplace pension schemes, a trust-based, Revenue-approved occupational pensions arrangement but with one key difference: instead of having a single sponsoring employer with a single plan, the master trust contains multiple participating employers, each with their own pension plan operating within the structure of the master trust,” explains Caitriona MacGuinness, partner with Mercer.

Within a master trust each employer retains full control over the benefit design of its plan, setting its own contribution rates and making its own decisions on the benefits and options they wish to provide to employees. The main difference is that a single board of trustees is responsible for its governance on behalf of all members of the trust.

“Whereas previously in a stand-alone pension scheme employers and their plan trustees would have shouldered this responsibility, employers participating in a master trust now effectively outsource these to the master trust trustee board,” says MacGuinness.

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Given the much-enhanced scope of regulatory requirements imposed on occupational pension schemes in recent years, this makes compliance easier – and cheaper. The accelerating demand from employers to use master trusts is largely being driven by the increasing burden of meeting the new regulatory requirements, MacGuinness notes.

These economies of scale make master trusts inherently attractive, agrees Shane O’Farrell, director of corporate partnerships with Irish Life Corporate Business. Their design means they are also future proofed, he believes.

“Looking ahead, the scale and structure of master trusts mean they are well positioned to evolve over time and meet new industry challenges in the future,” says O’Farrell. He says that, for members and employers alike, a big advantage is the “flagship” status of master trusts.

“Innovations are rolled out in master trusts first and they are leading the market when it comes to the quality of the additional supports and services offered,” he adds.

One area that has been particularly interesting to watch in the master trust space is member engagement and communications, where master trusts are undoubtedly leading the way, adds O’Farrell.

“The reality is that engaging members, tackling inertia and boosting low financial literacy around pensions to help members feel confident in this space is infamously challenging. And yet, in this new world of pensions, it has become infinitely more important.”

But while master trusts offer enhanced peace of mind when it comes to compliance, Maria Quinlan, head of LifeSight Ireland, says one disadvantage for employers is that they do not have the same control over governance, investment options and communications as they could with a stand-alone trust.

“For plan sponsors who have historically been very involved in championing their plan it may be hard to simply step back and hand over control, even in this case when putting it in the hands of a team of experts,” agrees O’Farrell. This is despite master trusts being subject to higher standards of governance, with additional specific master trust regulations expected in the coming months.

Many master trusts do allow employers to tailor key elements of services. Indeed, master trusts are far from one size fits all and each participating company can retain aspects of their own identity and plan specifics, including contribution rate and structures.

“But there are some limitations as to how bespoke the offering can be for each participating company,” says O’Farrell. “So, for example, rebranding master trust fund names is not an option as it may be in certain standard workplace pension plans.”

And while they are fully compliant with regulations, Quinlan notes that issues can still arise when it comes to governance.

The Government has long indicated its preference to reduce the number of individual pension plans in Ireland

—  Maria Quinlan, LifeSight Ireland

“Conflicts of interest may exist whereby the trustee, administrator and investment manager are inextricably linked and not fully independent of each other, and so the master trust may, for example, be compromised in addressing poor investment performance of an in-house fund manager, and ultimately leading the employer to potentially consider alternative master trusts in the future,” she explains.

But according to MacGuinness, master trusts are now beginning to allow employers to set up their own internal “governance committee”, which works alongside the master trust provider and gives greater scope for employers to participate more closely and offer input to decision-making.

The make-up of master trusts also allows employers to relieve themselves of the burden of pensions management.

Quinlan says most employers are either in the process of moving or have moved to a master trust; MacGuinness sees master trusts as fast becoming a vital part of the occupational pensions landscape.

“The Government has long indicated its preference to reduce the number of individual pension plans in Ireland,” she explains. “This has been further supported by the Pensions Authority noting the role of master trusts as the appropriate vehicles to support this rationalisation and consolidation.”

And according to MacGuinness, master trusts will also have an important role to play in relation to the forthcoming pensions auto enrolment system, as they mean employers will be able to use an occupational pension scheme to meet their auto enrolment obligations instead of using the new central retirement savings system which will be established by the State.

“For a number of reasons, including the tax advantages available for employees in occupational pension schemes, many employers are likely to consider this course of action and to use master trusts to do so,” she says.