Can a DB master trust help me improve my scheme’s governance? 

Defined benefit (DB) schemes face a governance burden that is an increasingly complex challenge.

DB schemes must make decisions about investment and funding strategy, comply with standards on risk reporting, meet their environmental, social and governance (ESG) responsibilities, and keep on top of other issues, including cyber security.

The governance burden is increasing as the vast majority of private sector DB schemes are closed to new members, making those schemes legacy issues for their sponsors. The largest DB schemes have the resources and scale to plan their own path, but for most schemes governance is increasingly difficult to manage.

A DB master trust offers a simple solution to the increasing governance workload. By bringing together many schemes under one trust, individual schemes gain the benefits of scale and professional expertise. Each scheme is ring-fenced and the sponsor continues to pay contributions with high-level oversight.

  1. Master trusts deliver professional governance

    It is becoming harder for sponsors to recruit trustees from within their organisation to govern their pension schemes. The job is increasingly complex and requires an ever-greater time commitment. Bearing in mind that trustees are personally liable for their decisions, this trend is likely to increase.

    The government and The Pensions Regulator are aware of these challenges and want schemes to consider whether they would benefit from some form of consolidation.

    A DB master trust is a consolidation option that allows sponsors to transfer the day-to-day running of their pension scheme to professionals with the expertise to meet the challenges of regulatory requirements. For sponsors a DB master trust means one less important, complex thing to worry about. Management can be freed from the day-to-day hassle of the occupational pension scheme, leaving more time to concentrate on matters directly related to their business and its success.

  2. Agile in fluctuating markets

    Governance at DB schemes moves more slowly than investment markets — especially if we accept that high volatility is here to stay. Some trustees still meet quarterly but even if they were to meet monthly they would be unable to keep up with fluctuating markets.

    The best DB master trusts are far more agile, allowing schemes to potentially secure favourable pricing that would not be captured by traditional DB scheme governance. We explore the investment benefits of master trusts further in another blog in this series.

  3. Achieving your endgame

    The ultimate aim of an occupational pension scheme is to ensure that members’ benefits are paid when they become due. To enable a DC scheme to do this, it must be affordable to the sponsor. Over-reliance on a sponsor’s ability to make deficit reduction contributions to the scheme is not in the best interests of any of the scheme’s or sponsor’s stakeholders.

    The right DB master trust solution should combine significant buying power with high quality and consistent governance. This could help schemes achieve their endgame more efficiently and potentially faster than they might be able to achieve otherwise.

    It’s important to remember that master trusts aren’t for everyone. The largest schemes may prefer to go it alone, while the very smallest may find the legal fees of transferring to a master trust prohibitive. But for schemes with between £10 million and £300 million of assets a master trust could be a cost-effective option.

How Mercer’s DB Master Trust helps schemes meet their governance burden

  • Taking on fiduciary management of the scheme’s assets to monitor investment markets and funding levels in real time to lock in favourable short-term pricing
  • The reassurance provided by three professional trustees from separate independent trustee firms who govern the master trust under advice from Mercer’s range of pension experts
  • Allowing the sponsor to set an endgame and letting the master trust get on with achieving it 

The endgame can be run-off — where the scheme becomes fully funded and no more sponsor contributions are required — or buyout — where benefits are secured with an insurer.

Mercer’s pension expertise combined with our £296 billion buying power as the world’s largest fiduciary manager enables DB schemes to reach their endgame more effectively and possibly more quickly at a lower cost — for the benefit of all stakeholders.

For most DB schemes the growing governance burden is increasingly difficult to manage. More schemes are considering a DB master trust to unlock the benefits of scale and professional expertise with potential positive results for their endgame strategy.
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