In this, the third instalment in our series of articles on pension scheme consolidation, we consider ‘master trust pension schemes’ and the rationale for replacing an employer ‘own trust’ scheme with a master trust.
We also illustrate how the potential benefits of a master trust can be magnified through the simplification of existing, and often very complex, benefit structures.
MASTER TRUST SCHEMES
Under this pension scheme consolidation model, employers that currently have their own occupational pension scheme (that is used only for their own employees or those of other employers in the same corporate group) transfer the assets and liabilities of that scheme to another occupational pension scheme that is:
So, the existing ‘own trust’ scheme for a single employer/ corporate group is replaced by a ‘master trust’ scheme for multiple unconnected employers/groups.
In effect, the existing scheme becomes a distinct section in the replacement scheme which has a single trustee board responsible for stewardship of all the assets and management and oversight of a common administration platform and set of advisers.
Liabilities of each of the unconnected sponsoring employers remain segregated (so one employer is not ‘on the hook’ for benefits due to employees of another employer). Also, if an employer becomes insolvent, their section of the scheme can be assessed independently of other sections for transfer to the Pension Protection Fund (PPF).
However, it is the differences between the existing and replacement scheme that are the real drivers for an employer to move from own trust to master trust.
The master trust pension scheme can offer an employer all the benefits of shared services / asset pooling (including economies of scale and investment outperformance). In addition, the scheme will be run by a single and professional trustee board.
In the interests of balance, it is worth highlighting that, by moving to master trust, where there is no employer or member nominated trustees, the employer could lose some influence over and the members some connection to the trustee board.
That said, it is becoming increasingly difficult to find individuals willing to act as MNTs and, in a scheme closed to all members, the priority for most employers will be cost savings and reduction in management time spent on a scheme that is no longer part of the current reward strategy.
This concept of maximising efficiencies is a nice segue into our next topic.
COMBINING CONSOLIDATION WITH ‘SIMPLIFICATION’
Typically, pension scheme benefits vary for members in different categories and even within a particular category there can (as illustrated below) be differences in:
Pension increases for deferred members before retirement;
Pension increases for retired members; and
Retirement ages for pensions attributable to different periods of service.
In addition, for formerly contracted-out schemes, there are the complexities of Guaranteed Minimum Pensions (GMPs) to consider.
Imagine if this:
Could be converted into this:
At the same time, GMPs could be converted into ordinary scheme benefits and overriding contracting-out requirements confined to the history books.
Transferring to a master trust can achieve the combined benefits of consolidation and simplification. Under this option, members’ benefits are transferred, without individual consents, to a section of a master scheme. Simplification is possible before or after the bulk transfer.
No changes to legislation are needed to achieve anything discussed so far in this article. Employers can, if they wish, obtain the financial, administrative and practical benefits of consolidation and simplification now.
The same cannot be said about the subject of the next in our series of consolidation articles – ‘Superfunds’ – which involve existing, solvent employers being discharged from their pension responsibilities in exchange for a cash sum (similar to, but potentially cheaper than, ‘buyout’).
In the meantime, we hope you find this article of interest and if you require any further information on how consolidation might work for your DB scheme, please contact your usual JLT Consultant or our Head of Technical, John Wilson