Despite the decision to join a master trust sitting with a pension scheme’s sponsor, the trustee’s view remains important. Pension scheme journeys are a partnership between sponsors and trustees; both wanting the best outcomes for scheme members. As responsible trustees, we need to consider which schemes the master trust approach might be right for and advise sponsors appropriately.

For defined contribution (DC) schemes there are clear advantages to consolidation in terms of costs and developing member services, but areas of concern over herd mentality of default funds which most members will use. If the market does not become too condensed and employers maintain some governance oversight (and willingness to switch providers) then everyone should benefit.

The defined benefit (DB) world is more nuanced and really depends on the scheme-specifics and the sponsor’s position so I’ve set out my thoughts on this in more detail.

DB master trusts – the pros and cons

I’ve compiled a table below with input from various industry contacts. These apply in different weightings to the various master trusts in the market but are common to all. I’ve considered some common scheme/sponsor scenarios to try and draw conclusions on where the balance lies. For example:

• Strong vs weak covenant
• Sponsor capacity for engagement
• Smaller vs larger schemes
• Buy-out or run-on endgame destination, and
• Type of governance model outside a master trust.

In short, scheme size and sponsor appetite for involvement really matter but for most an individual solution should deliver the best outcome. Moderately sized schemes with decent covenant backing and a professional trustee on the board should be better placed to plot an optimal course for any endgame destination. Performance of the specific master trust is also a key factor and it is possible to move into and out of master trusts, so it is not a once and for all decision.

So what were the main pros and cons?

The scenarios

• Convenant – With a weak covenant the balance lies between the ability to develop a bespoke journey plan (retaining short-term risk to the members benefits) and finding a safe-haven that can provide a guaranteed long-term approach and more certain member outcomes. For stronger covenants the decision rests on the merits of the other scenarios.
• Sponsor engagement – Sponsors with low pensions knowledge and limited scope to engage are generally unable to develop and manage bespoke strategies. A master trust can take all this away provided the downsides are accepted. For any sponsor seeking to optimise their individual strategy and willing to engage with their trustees and respective advisers, then an individual scheme is optimal.
• Scheme size – With core governance costs being similar from scheme to scheme there is a clear advantage for master trusts at the micro-scheme level (unless already in an endgame scenario or short journey plan to one). However, this can be eroded by the services that are included, e.g. fiduciary management may not be needed but is sometimes a core service.   Beyond a certain scheme size (>£50m and potentially lower) schemes should be able to find a similar cost base so that other considerations carry more weight.
• Endgame destination – The rationale for running-on, the agreed purpose, power under scheme rules etc are highly individual and unlikely to be served well by any master trust so a standalone scheme is clearly optimal. For schemes targeting buy-out the choice is generally between a safe journey under a master trust (i.e. lower investment risk, longer timeframe and/or higher contributions) and a more tailored approach that can be expected to achieve the goal quicker/cheaper but may carry more risk of adverse outcomes.
• Governance model – Master trusts use professional trustees who can leverage their knowledge to deliver higher governance standards. However, where trusteeship and service provision lines are blurred the conflicts can undermine the ability to find best in class service provision.   Professional trustees serving standalone schemes (either as part of a board or as sole trustee) should be able to justify their costs by bringing their wider knowledge of the industry and other scheme scenarios into operational and strategic decisions. This can reduce provider costs and/or raise standards such that delivery of the strategic plan is optimised.

Conclusion

Perhaps unsurprising given my chosen profession, but I back professional trustees to deliver better overall outcomes for moderately sized schemes where there is an engaged sponsor. The balance for large schemes and those seeking to run-on clearly leans towards individual schemes as well for me.

For smaller schemes it is a more difficult decision but if recent funding improvements have brought them closer to their endgame then a master trust may not have as much of an advantage as they might have a few years ago.

So what are the actions? Schemes should review their future operating model in light of market developments. Master trusts should be considered for smaller schemes. Any sponsors with schemes currently in a master trust should consider whether they are happy with the service and strategy. Exiting into a standalone scheme is a proven option.

For more information on any of the above, please speak to Phil Williams from our Small Schemes team.