Not All Master Trusts are Created Equal

30 September 2017

Q&A guide for employers

Master Trusts are fast becoming the pension’s vehicle of choice for larger employers.

Much of their appeal lies in the potential for employers to eradicate the governance burden and associated costs of running their own scheme whilst preserving some influence over member communications and investment design. The ability to customise their own section of the scheme also makes certain Master Trusts particularly attractive to both paternalistic employers and those with legacy benefits.

Over recent years, the surge in demand for Master Trusts, brought about largely by auto-enrolment, has led to a dramatic increase in supply, with many life companies, benefit consultants and IFAs entering the market. This has made the process of evaluating potential providers, and receiving genuinely independent advice, increasingly difficult for employers and trustees.

However, asking some key questions early in the selection process can help you to identify which Master Trusts fit best with your corporate culture, will enhance employee recruitment, retention and retirement, and can align with your existing HR and payroll processes.

1. Are they ready for Master Trust authorisation?

Asking some key questions early in the selection process can help you to identify which Master Trust is the best fit.

The 2017 Pensions Act requirements will further drive the consolidation of Master Trusts over the coming years, so it is important to check whether potential providers are financially secure, committed to the market and have robust business plans in place. The Pensions Act should ultimately ensure that all Master Trusts authorised from October 2018 have fit and proper Trustees, are well run and financially stable with sufficient resources to wind up in an orderly manner if required. However, you will naturally want to avoid selecting a provider now that you subsequently need to replace a few years down the line.

2. How well does the Master Trust support members into retirement?

The majority of Master Trust providers have created off-the-shelf default strategies to accommodate the pension flexibilities that came into force in April 2015. However, not only should your default strategy be closely aligned with your members’ retirement needs now, but it must be able to be adapted as our understanding of retirement needs (and specifically those of your members) evolves over time.

3. How important will you be to them?

Find out what their existing client portfolio looks like and think about how you would fit in. Becoming their largest client is fine, as long as they can demonstrate they have the skills, experience and resources to meet your needs. You probably don’t want to be the smallest client if that places you last in the pecking order for updates and support. Look for providers you believe would value you as a customer and can provide you with dedicated support from appointment through implementation and into ‘business as usual’.

4. Will they offer you customised investment strategies, administration and communications?

One size does not fit all as contribution rates, salaries and financial knowledge varies greatly between organisations. For this reason, default investment strategies, administration processes and communications should be tailored to suit your scheme’s membership and be adapted as it evolves.

Where providers claim to offer this capability, ascertain the number of clients for whom they already do this and the extent to which their solutions are truly customised. The lure of a new client can encourage some providers to offer you services they have never provided before, which could mean manual processes and workarounds, which are prone to failure and potentially disastrous results.

Providers with a long history of administering trust-based DC schemes, and with a clean bill of health from all of their Master Trust Assurance reports, are more likely to be able to provide a customisable scheme with suitably robust processes and governance.

5. How well does the Master Trust support members into retirement?

The majority of Master Trust providers have created off-the-shelf default strategies to accommodate the pension flexibilities that came into force in April 2015. However, not only should your default strategy be closely aligned with your members’ retirement needs now, but it must be able to be adapted as our understanding of retirement needs (and specifically those of your members) evolves over time.

Providers should be able to supply members with a good mix of information, guidance and advice prior to using the flexibilities ‘in-scheme’ and directly from their accounts. Many providers have no history of running pensioner payrolls, so make sure your provider has the experience and technology to make regular and irregular payments to retirees.

A critical evaluation of the answers to these questions should result in a robust shortlist of suitable providers.

If the selection process is still proving complicated, then consider appointing an experienced and independent consultancy to guide you through the process.

Legal Note

This document and its contents are directed only at persons who have been classified by SEI Investments (Europe) Limited as a Professional Client for the purposes of the FCA Conduct of Business Sourcebook. This information is issued by SEI Investments (Europe) Limited, 1st Floor, Alphabeta, 14-18 Finsbury Square, London EC2A 1BR, United Kingdom, which is authorised and regulated by the Financial Conduct Authority. No offer of any security is made hereby. Whilst considerable care has been taken to ensure the information contained within this document is accurate and up-to-date, no warranty is given as to the accuracy or completeness of any information and no liability is accepted for any errors or omissions in such information or any action taken on the basis of this information.