New multi-employer trust-based options for pensions auto-enrolment

A number of new master trust pension arrangements have been launched to compete directly with the National Employment Savings Trust (Nest). The main attraction is that they take care of governance centrally. Occupational Pensions take a look at what is on offer.

On this page:
Master trust market expands rapidly
Nest sets benchmark
Governance headaches removed
Refunds: here today, gone tomorrow
Charges and charging structures
Exclusions and transfers
Predicting sucess
Table 1: Master trusts generally available plus Nest
Table 2: Charges, refunds, default funds and governance for master trusts and Nest
Table 3: pros and cons of alternative vehicles for auto-enrolment.

Key points

  • A survey conducted by Occupational Pensions has identified 10 organisations that are offering a master trust pension arrangement to employers from any industry for auto-enrolment purposes. The most recent participant in the market was announced in June 2012.
  • The key attraction of master trusts is that the provider can take on some or all of the governance responsibilities. In the short term, most also allow refunds of contributions for early leavers.
  • Master trusts operate in a very similar way to Nest, but the latter allows only basic-rate tax relief at source, limits contributions, permits only limited transfers-in/out and does not pay death benefits under discretionary trusts.
  • There are a range of providers, with varying experience of operating master trusts, different charging structures, and bundled and unbundled offerings.
  • At least seven providers will permit refunds of contributions to early leavers.
  • All offer lifestyle default investment funds, but some allow employers a choice of default.
  • Unlike Nest, none of the master trusts levy a charge on contributions.
  • Most providers reserve the right to decline unprofitable business and all accept transfers-in, although with some caveats.
  • Marks & Spencer is replacing its existing defined-contribution (DC) scheme with the Legal & General bundled master trust.

Master trusts are not new, but their wide availability is. Until now master trusts have been used primarily to allow non-associated employers to participate together in industry-wide schemes, some of which were defined-benefit plans. Now, a number of DC arrangements have been established to allow employers from any industry to belong to a trust-based scheme that is operated centrally, in particular to meet the auto-enrolment requirements. They are an alternative to group personal pensions (GPPs), an individual trust-based scheme and Nest.

The main differences between master trust arrangements, GPPs and Nest are summarised in table 3. As the name suggests, a master trust is a trust-based rather than a contract-based arrangement. Like a GPP, the provider of a master trust will normally offer scheme administration and governance, a so-called investment "platform" (a means of accessing the investment funds on offer) and member communications.

In this survey by Occupational Pensions, we look at the 10 master trust arrangements available (see tables 1 and 2). We have deliberately excluded multi-employer arrangements available only to those in specific sectors, or only for deferred pensioners.

Master trust market expands rapidly

With the introduction of Nest, the master trust market has expanded rapidly. Occupational Pensions has identified 10 participants that offer a master trust to employers from any industry, and believe this to be a comprehensive list.

The nature of the providers varies from industry-wide schemes that have operated for some years but have expanded to accommodate any employer (BlueSky and The People's Pension), through to large insurers (Legal & General and Standard Life), third-party pensions administrators and consultants (National Pension Trust and NOW: Pensions Trust) and investment companies (BlackRock), to institutional investment advisers (the Pensions Umbrella Trust) and smaller consultants (The Pension Master Trust and SuperTrust UK). In addition, as noted above, there are some industry-specific providers, which we have excluded (such as The Pensions Trust for the not-for-profit sector) but which may have large numbers of members.

It is clear that providers are aiming at different segments of the market. Standard Life is upfront about this, saying that its proposition "provides solutions for medium-to-large clients looking for a comprehensive workplace pension plan". One of the key decisions that employers will need to make is whether they want a bundled service (with administration and investment provided by one organisation) or a scheme that allows greater choice but may be more complex.

In some cases master trust administration is being outsourced. Dean Wetton Advisory, which has set up the Pensions Umbrella Trust, is also administering SuperTrust UK, while Xafinity is also administering NOW: Pensions Trust. How much administration is being undertaken by the provider varies and employers will need to decide how much of the communications they want to handle (for example, with staff newly eligible for auto-enrolment) and the extent to which they want their own branding on literature.

BlackRock was the latest provider to enter the market in mid-June and more may follow. Dean Wetton Advisory is in the process of trying to set up an industry group for master trust providers.

Nest sets benchmark

The provisions of Nest are setting the standard against which master trusts are judging themselves. Its governance and investment monitoring will no doubt be of a high order, but its charges have attracted criticism. It also has a number of other disadvantages.

While master trust arrangements allow full tax relief at source, Nest and GPPs attract only basic-rate tax relief at source, with the balance reclaimable by members on their tax return. In addition, contributions are limited to a maximum of £4,400 for 2012/13, whereas none of the master trusts have a cap on contributions. Nest also prohibits transfers-in (except for the benefits of early leavers from occupational schemes) and transfers-out (unless the member is over 55 years of age). In addition, death benefits are not paid under discretionary trusts so may be subject to inheritance tax.

Governance headaches removed

Most master trust providers see simplicity of governance as the key selling point for this approach over GPPs, an advantage shared by Nest.

As table 2 shows, the actual governance arrangements adopted vary, but none oblige an employer to have active involvement. All the arrangements have at least one independent trustee, with Pitmans Trustees featuring for four trusts. None require member-nominated trustees.

Dean Wetton Advisory says that one attraction of master trusts is that if the trustees wish to move to an alternative investment manager this can be accomplished much more easily with a master trust than with a GPP. This will be truer of some trusts than others. Some master trusts will monitor investment performance closely and be able to respond by replacing managers readily, and in future this is an area that may lead to employers swapping to an alternative provider, or to Nest, which is well placed in this respect.

Refunds: here today, gone tomorrow

Under existing legislation, schemes can allow members who leave with less than two years' service to take a refund of their contributions. In these circumstances the employer's contributions are also refunded. Since 6 April 2006, members with at least three months' service but less than two years' service have had to be allowed to transfer their fund elsewhere, but members with less than three months' service can still be required to take a refund.

There are two advantages for employers of offering a refund: there is a cost saving, because employer contributions are refunded; and there is an administrative saving as a small pension pot does not have to be retained. GPPs and Nest cannot allow a refund.

The Department for Work and Pensions made it clear that it will legislate to outlaw refunds to DC trust-based schemes. It recognises that ending refunds will create an administrative headache because of the number of small pots that schemes will need to look after. Consequently, it intends to abolish refunds by 2014, but only if by then it has found a solution to the small pots problem. In fact, our survey finds that at least seven master trusts permit refunds.

Charges and charging structures

Standards of administration and the charges levied are likely to be two of the most important factors in determining the selection of one master trust rather than another.

Nest levies an annual management charge and a charge on new contributions. Many fear that the latter will be off-putting for members who will see their contributions reduced before they are invested. None of the master trusts plan to utilise such a charge, with all using annual charges based on the fund size, although in some cases with an additional per-member fee or the option to operate exclusively on a fee basis.

Comparing charges between providers is difficult. Indeed, BlackRock, Legal & General, National Pension Trust and Standard Life will calculate charges on an employer-by-employer basis, depending on factors such as contribution levels, membership numbers and staff turnover. It may be that those willing to determine fees individually will be best placed to win the larger employers, but transparency is probably attractive to smaller employers.

What is included in charges may vary significantly, notably in relation to the extent of administration undertaken, setting investment strategy and monitoring investment managers' performance. Administration capabilities will also vary.

In every case the default fund is a lifestyle arrangement. In most instances the master trusts do not allow individual employers to select an alternative default fund. BlackRock and SuperTrust UK, however, will do so.

Exclusions and transfers

Some of the master trusts say they might exclude unprofitable employers. Legal & General, for example, reserves the right not to accept business if its terms are uncompetitive. In practice, that is likely to be the position taken by most of the master trusts, but The People's Pension says specifically that it will not decline anyone. Nest is under an obligation to accept all comers, however unconventional or awkward their arrangements.

All of the master trusts will accept transfers-in, although there may be limitations and not all will accept protected rights from schemes that were formerly contracted out. Legal & General notes that it will not accept transfers-in from DB schemes unless the members first receive advice to do so. All of the master trusts will allow transfers-out. This is in contrast to Nest, which allows limited transfers.

All of the schemes are exclusively DC arrangements and, unlike Nest, none set limits on contributions.

Predicting success

Naturally, the well-established master trusts have the most members. Most others, set up for auto-enrolment, have no members yet, or very few, and it is difficult to gain an impression of how successful individual master trusts will be and whether or not master trusts generally will grow their share of the market. So far only one major employer, Marks & Spencer, has announced that it is to use a master trust and has selected Legal & General's "bundled master trust" for auto-enrolment to replace its existing trust-based DC scheme. It will begin auto-enrolling this autumn.

Occupational Pensions expects that the ability for employers to contract out governance will prove attractive to many, and that charges and perceived standards of administration will be critical in determining where new business is placed.

Table 1: Master trusts generally available plus Nest

Scheme

Provider

Scheme opens to members

Membership to date

Contact details and website

BlackRock DC Master Trust

BlackRock, asset management firm

Fourth quarter 2012

None yet, just announced

020 7743 5189,
david.snowdon@blackrock.com
www.blackrock.co.uk/DCTrustees/index.htm

BlueSky Pension Scheme

Joint Industry Board (JIB), a not-for-profit body for the electrical contracting industry, effectively owned by Electrical Contractors Association and Unite union

Established in 1988 as JIB Pension Scheme, and in revised form in October 2011; open to new members from any industry in January 2012

225 employers and 15,000 members

Jessica Battersby, pensions delivery manager, 020 8269 8532; Paul Bannister, chief executive officer, 020 8269 8531
www.blueskypensions.co.uk

Legal & General WorkSave Mastertrust

Legal & General, large insurer

September 2011

10,000+ members

Ian Foster, development director, workplace savings, 07739 340857,
ian.foster@landg.com
www.legalandgeneral.com/businesssolutions/pensions

National Pension Trust

Xafinity, employee benefit specialist, administrator of the trust (but could be removed)

2009

18 employers

Ken Anderson, head of DC solutions,
0118 918 5457,
ken.anderson@xafinity.com
www.xafinity.com

NOW: Pensions Trust

ATP, largest Danish pensions provider

January 2012

A "number" of employers

033 3332 2222,
info@nowpensions.com
www.nowpensions.com

Pensions Umbrella Trust

Dean Wetton Advisory, institutional investment advisers (but could be removed)

December 2010

Two employers

0845 5040 500,
info@pensionsumbrella.com
www.pensionsumbrella.com

Standard Life Master Trust

Standard Life, large insurer

October 2011

Has members but numbers not disclosed

Kim Gray, proposition manager, 0131 245 9803

SuperTrust UK Master Trust

SuperTrust Ltd, specialist company

2005

Five employers

Malcolm Delahaye, 01252 703708
www.standardlife.co.uk/1/site/uk/pensions
www.supertrustuk.com

The Pension Master Trust

Goddard Perry, third-party administrators

April 2012

None yet

Steve Goddard, 020 8603 3700, steve.goddard@goddardperry.com
www.goddardperry.com

The People's Pension

B&CE, a not-for-profit body for the construction industry

October 2012 for any employer

Not yet open but has 500,000 members in existing stakeholder scheme, and most are expected to transfer

0800 612 8080
www.thepeoplespension.co.uk

National Employment Savings Trust (Nest)

Nest Corporation, government agency

On trial basis from mid-2011, fully open from July 2012

Some employers operating on a trial basis

0300 303 1949, employer.enquiries@nestcorporation.org.uk
www.nestpensions.org.uk

Table 2: Charges, refunds, default funds and governance for master trusts and Nest

Scheme

Charges

Contribution refunds allowed

Default fund

Trustee arrangements

BlackRock DC Master Trust

Set for each specific employer based on their requirements

Yes

To be decided but will be lifestyle, and employers will be able to set their own default fund

Independent Trustee Services Ltd, an independent trustee company

BlueSky Pension Scheme

None to employer; AMC of 0.3% for 2012 (max of 0.5% permitted); investment charges from 0.2% (0.26% for default fund) built into unit pricing

No

Target date funds with dynamic asset allocation determined by AllianceBernstein

Currently, three trustees from Electrical Contractors Association, three from Unite union, one from Select (Scottish electrical trade body), plus independent chair

Legal & General WorkSave Mastertrust

None to employer; AMC underwritten on an employer-by-employer basis depending on membership demographic; fund management charge from 0.08%, with 0.13% for default option

Yes, but employers can choose not to offer a refund if they wish

Multi-Asset Lifestyle Profile: with a strategic allocation of 40% each for equities and bonds and 20% in alternatives, de-risking over a 10-year period. It is predominantly passive, but asset allocation is active

Legal & General Trustees Ltd and Pitmans Trustees Ltd, an independent trustee company. User group will be set up if there is sufficient demand. Clients can choose "sole governance" (with trustees taking decisions) or "shared governance" (allows client to influence investment and communications strategies)

National Pension Trust

None to employer; AMC is member-specific depending on number of members and amount of contributions

Yes

Balanced lifestyle strategy

Bridge Trustees Ltd, an independent trustee company

NOW: Pensions Trust

0.3% annual product investment management charge (APIMC) + £1 pmpm admin charge; reduced monthly charge for those earning less than £18,000 during phasing-in period; lower of 0.5% APIMC and 0.3% APMIC + £1.50 pmpm for deferred members

Yes

Flexible target date lifestyle arrangement based on Managed Diversified Growth Fund, Managed Retirement Protection Fund and Managed Cash Protection Fund

Six individual trustees including Chris Daykin, former UK Government actuary, and John Monks, former TUC general secretary

Pensions Umbrella Trust

None to employer; AMC of 0.65% for administration plus investment charge (average of 0.3% for default)

No

"Three pillars of life" approach: diversified lifestyle fund

Pitmans Trustees Ltd, an independent trustee company

Standard Life Master Trust

None to employer; typically, a single AMC with rates set for individual employers based on membership, contribution levels and turnover, although fee options are available

Yes

Choice of off-the-shelf options based on a suite of risk-based strategic lifestyle profiles in the MyFolio range

Pitmans Trustees Ltd, an independent trustee company

SuperTrust UK Master Trust

None to employer unless fee agreed to reduce other charges; admin. charge of 0.15% to 0.5% plus an investment fee from 0.15%. Maximum all-in charge of 0.95%

Yes

Agreed with employer/advisers, otherwise "aspirational DC" with dynamic customised asset allocations

SuperTrust UK Pension Trustees Ltd and Pitmans Trustees Ltd, an independent trustee company

The Pension Master Trust

(1) 0.5% AMC; (2) 0.3% AMC + £1 fee pmpm; or (3) 0.4% AMC with active member discount

Yes

BlackRock Aquila 50/50 Bond & Equity Index Fund

Blake Lapthorn Pension Trustees Ltd, an independent trustee company

The People's Pension

None to employer; AMC of 0.5%

To be decided

B&CE Global Investments Fund (up to 85% equities, modified in final 15 years to retirement)

PAN Governance LLP, an independent trustee firm, is the corporate trustee, with its chief executive chairing the trustee company; chair of BESTrustees Ltd is also a trustee

Nest

None to employer; 1.8% of new contributions + AMC of 0.3%

No

Series of Target Retirement Date Funds

Currently 11 individual trustees (14 are permitted), chaired by Lawrence Churchill, who formerly chaired the Pension Protection Fund

Note:
AMC = annual management charge
pmpm = per member per month.

Table 3: Pros and cons of alternative vehicles for auto-enrolment

Feature

Employer trust

Master trust

Group personal pension

Nest

Trustees

Yes

Yes (but independent, no MNTs)

No

Yes, Nest Corporation

Refunds for early leavers

Yes

Yes

No

No

£2,000 triviality option

Yes

Yes

No

Yes

Minimal employer involvement

No

Yes

Yes

Yes

Higher-rate tax relief at source

Yes

Yes

No

No

Separate group life scheme

No

No

Yes

Yes

Contribution cap

No

No

No

Yes

Transfers-in/out

Yes

Yes

Yes

No

MNTs = member-nominated trustees

Source: JLT Benefit Solutions.