The unstoppable rise of the mastertrust?

Neil Copeland

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There are clear advantages of mastertrusts for DC pensions – economies of scale in terms of costs and purchasing power around investment, administration, advisory services and compliance costs, and improved governance due to an engaged professional trustee, for example.

This is because most employers need the same thing from a DC scheme. It’s essentially just a tax efficient savings vehicle, so every member and employer benefits from these advantages.

To a degree, one size can fit all for employers with regard to DC pensions.

However, a bit like Tolstoy’s families, unhappy DB pension schemes are all unhappy in their own way.

One of the advantages of scheme specific funding, and this has become even more important in recent years, is that it does provide trustees with a lot of flexibility in dealing with specific issues related to their scheme and employer or sponsor.

There have been a number of announcements recently putting forward DB mastertrusts as a potential solution for legacy DB schemes – I’m not sure how many we need to constitute a bandwagon, but we must be getting close.

DB mastertrusts are not a new idea, but existing examples have been unable, to date, to respond to the needs of trustees and employers in the current dynamic pensions environment.

DB mastertrusts have often limited the flexibility available to employers to deal with issues in a way that best suits their specific circumstances, covenant and business plan. So for employers who currently have their own standalone DB schemes, DB mastertrusts may hold little attraction.

In DB schemes the one-size-fits-all approach is the antithesis of what is required – you do not want a one-size-fits-all investment strategy, you do not want a one-size-fits-all funding plan and you do not wants a one-size-fits-all strategic plan for your pension scheme.

There have also often been hidden cross subsidies between employers in traditional DB mastertrusts which in our experience are not clearly understood by employers and sponsors.

A number of existing DB mastertrusts operate on a last man standing basis meaning there is the potential for employers to end up funding the benefits of Scheme members who never worked for them or made any contribution to the employer.

In a true mastertrust the professional trustee will be responsible for the decisions, although there are suggestions in some recent examples that existing trustees would stay in control of their section when they join.

It might be possible to construct a governance structure at a sectional level that allows the former trustees to retain some influence but the less of a collective approach you have the more you undermine the rationale for a “mastertrust” in the first place.

To allow the mastertrust to be effective in terms of minimising legal costs and a consistency in documentation, all the meaningful powers reside with the professional trustee.

The suggestion with some of these new DB mastertrusts appears to be that the sections will remain segregated, so presumably each section can have its own investment strategy, funding plan etc, but if you actually retain the flexibility of a standalone DB scheme to any real and meaningful extent then you lose the potential cost savings that the collective approach of a true mastertrust is claimed to deliver. (Although an employer trapped in a non-segregated last man standing DB mastertrust. Such employers might find a transfer to a segregated DB mastertrust as the least bad option)

And finally we come to the biggest issue of all.

We spend a lot of time and effort trying to extricate clients from DB mastertrust arrangements where they no longer want their pension strategy dictated to them regardless of their specific circumstances and needs.

The traditional inflexibility and restrictions on exit from DB master trusts are major barriers for clients using them developing scheme specific scheme management plans and a major disincentive to new clients taking them up.
Possibly in recognition of these barriers we have seen commentary from some of the new DB mastertrust providers stating that exit is “possible”.

We deal regularly with employers trapped in DB mastertrusts where, on first glance, exit appears “possible”. However the conditions that can be applied to any actual exit often make exit impossible or prohibitively expensive and a trustee or employer would need to take legal advice on how any exit strategy would work.

And the power sits with the professional trustee.

We actually think professional trustees are a good idea and can play a very positive role in working collaboratively with employers to deliver outcomes that work for the trustee, the members and the employer.

However, where the employer believes that a change is necessary it is important that they retain the ultimate sanction of being able to change the professional trustee.

Being stuck with a trustee with whom your relationship has broken down or about whom you have concerns, where all meaningful power in the relationship resides with that trustee, is not a comfortable place for any employer to find themselves.

On balance, for the vast majority of employers and scheme sponsors who currently have their own standalone DB scheme, being master of their own DB destiny will continue to trump a DB mastertrust.

Neil Copeland

Post by Neil Copeland

Director, pensions consultant and adviser to trustees and employers on all aspects of work based pension schemes.