19 Dec 2023
Why are we seeing consolidation of company pension plans into Master Trusts in many countries around the world, and is this a good thing for members?
To answer these questions, we first need to understand how these trends may develop as the future of retirement provision.
In the past, occupational retirement plans in many countries including the UK, Ireland, the Netherlands and Switzerland were generally either set up as insurance contracts or as company-specific self-administered plans.
These self-administered plans need to be set up under a trust to ensure they are tax-efficient and run in the best interest of the plan members. Trust fiduciaries must act in the best interest of plan beneficiaries and follow plan rules, legislation and regulations when making decisions and administering the plan.
Master Trusts are trust-based plans that include members from multiple unrelated employers. A trust-based approach provides greater flexibility to make changes in line with the plan members’ interests as new circumstances arise.
Master Trusts (or their equivalents) such as APFs in the Netherlands and collective foundations in Switzerland, have rapidly increased in recent years. Master Trusts are expected to reach the equivalent of £461 billion in assets by 2029, according to Broadridge research. In the UK, The Pensions Regulator estimates that Master Trusts are ‘set to account for over half of all future workplace pension arrangements’.
So, what is driving the move to Master Trusts?
It is increasingly onerous for companies to manage retirement plans in the face of increasing regulation and legislation. In the EU, plans are now required to have risk management and internal audit functions, as regulation requires pension plan governance to come into closer alignment with insurance company governance. Against this backdrop, fewer employees are prepared to give the time and take on personal liability by becoming a trustee or fiduciary.
An increasing number of plans face litigation over complex and technical issues, with examples including investment management fees in the US and auto-enrolment contribution payments in the UK. Administration and disclosure requirements are very detailed and specific but is not a core area of business for multinational companies. The high fixed cost of maintaining a retirement plan can push companies to seek economies of scale through pooled arrangements. This can carry significant risk.
HR transformation has significantly reduced or eliminated local HR teams in small- and medium-sized countries for most large multinationals. Plus, few companies have local experts that can advise on investment strategy, investment manager selection, or appropriate member investment choices (such as default funds and lifestyling strategies). With scarcer resources and less bandwidth to effectively monitor investment manager performance, managing these plans using internal resources becomes that much harder. Yet specialist expertise is increasingly required to ensure plan members are getting the best deal from their investment providers.
In a Master Trust, the scale that multiple employer plans offer provides greater access to a broader range of investment sectors and potentially at lower cost than in a typical single-employer plan. In addition, the responsibility of selecting investment managers and monitoring investment performance and fees sits with the Master Trust trustees or fiduciaries.
Employees now expect a consumer-grade personalized experience when engaging with their retirement benefits. Technology has enabled online management of contributions and investments alongside meaningful and personalized output. This has contributed to better engagement with defined contribution (DC) retirement plans. AI is set to take these innovations to a new level; plans will need to evolve in response.
However, technology solutions may only be worthwhile for large employee populations given the significant investment they require. Master Trusts can meet this need by spreading the investment over many companies. Alongside this, very large member numbers make it feasible to drive efficiencies in administration costs, build sophisticated modelling and projection tools and provide member-friendly portals to meet employee needs.
Is a move to a Master Trust a good thing for plan members?
These three drivers are moving companies and fiduciaries to consolidated solutions such as Master Trusts. But is this a good thing for plan members? The answer is overwhelmingly “yes”:
Greater comfort around regulatory compliance and risk mitigation
Master Trusts give greater comfort that the plan will be administered to a high standard, that investment oversight is sound, and that operational risks are addressed. In part, this is because a specialist provider runs a Master Trust as a core element of its operations, rather than trying to manage a plan alongside its core business. Meanwhile, trustees provide their services as professionals rather than volunteers. There is also the security of the regulatory standards to which Master Trusts are held. In many countries, these standards are more rigorous than smaller employer plans.
Lower fees through scale economies
Intense competition between Master Trusts and consolidation within this sector have fueled further innovation and reduction in costs, while investment management charges are generally regressive. They represent a lower percentage of assets where the overall value of assets is higher, all other things equal.
More opportunity through technology
Technology enables greater flexibility and choice for plan members through more sophisticated modeling tools, the ability to actively manage investments and an experience for members that foster engagement. Larger plans allow for better technology at a more manageable cost.
What about defined benefit plans?
Defined benefit (DB) plans can be harder to transition, unless a separate section is available under the Master Trust that avoids cross-subsidies between participating companies’ sections. This can be the case in countries including the UK and Netherlands, but not generally in Switzerland or Ireland.
Sectionalized arrangements can involve ongoing relationships with legacy employers, so many of the scale economy benefits associated with DC Master Trusts can still be achieved. Without the ability to administer member benefits in different sections, a Master Trust would need to have a carefully designed entry price mechanism to avoid diluting the security of existing member benefits. This requires bespoke regulation, as seen in the UK.
Master Trusts at a glance
Master Trusts are a welcome addition to the plan management toolkit and intense competition and consolidation within them have fueled innovation and even lower charges, contributing to potential for better member outcomes.
Master Trusts have the potential to:
- Remove inefficiencies
- Reduce costs
- Mitigate risks
- Save on management time (versus managing a plan internally)
Meanwhile, the economies of scale mean that for a lower cost, plan members can potentially benefit from:
- Greater investment choice
- Better online account management
- Improved modeling tools with a consumer-grade experience
In some Master Trusts, schemes can only invest in the founding institution’s proprietary funds, concentrating risk. Indeed, where a single group of related companies provides all of the services for a Master Trust’s scheme, the risk of conflict of interest can be a potential concern. Also, as trustees are typically appointed by the pension provider, there can be potentially less freedom in investment choice compared to a typical contract-based scheme. Care is needed when selecting a Master Trust to make sure any such issues are identified and allowed for in the comparison of providers.