The growth of master trusts in recent months (and years) has been remarkable. In next to no time master trusts have become the choice of pension provision for employers auto-enrolling their employees for the first time. David Bird (Head of Proposition Development, LifeSight) talks about bulk transfers without consent, the means by which many employers are transferring all past defined contribution (DC) assets into master trusts.
What may be less well known when considering the growth of master trusts is how many employers seeking to use a master trust for future service for all of their employees are also transferring all of their past defined contribution pensions into a master trust.
In practice, the idea is deceptively simple. The employer can outsource all future and past DC pension provision by appointing a master trust and asking the current scheme trustee to transfer the existing scheme assets into the master trust as a bulk transfer without consent.
Well as anyone who has experience of this in practice the answer, as with so many other aspects of pensions, is far from simple. But, it is achievable with care and preparation.
What are the obstacles?
The most common obstacles come from three different directions – increasing member borne costs; investment and protections. Each requires the company to think through in advance what the trustee will need to be able to sign off on a transfer without consent. The company needs to anticipate what advice will be given to the trustee and prepare the way so that the advisers can make a positive recommendation for a transfer without consent.
What are the potential obstacles to look out for?
- Increasing member borne costs: It is often the case that employers currently meet the cost of governance and administration, with members paying for the cost of investment. On moving to a master trust most employers will be asking members to bear all of the costs of their pension provision.
- Investment: Transferring assets from one scheme to another invariably incurs transaction costs. It is also very likely that the investment philosophy and approach of the current trustee will not be identical to that of the master trust.
- Protections: On transfer members may lose certain rights and protections including scheme specific lump sum, early retirement age and potentially Lifetime Allowance protections. These may successfully transfer if the existing scheme is a DC only trust but the situation is typically much more complex for mixed benefit trusts.
How can these obstacles be overcome?
Preparation and planning are the key. If an employer decides they want to use a master trust by simply selecting their favoured provider, and then asks the trustees to transfer the past assets to the master trust, they are very likely to run into some of or all of the obstacles outlined above.
If the employer has anticipated the legitimate concerns of the trustee they can make proposals to address those concerns.
To put that into practice: If we think about member borne costs; the company could share its concerns and desire to have members pay more or all of the costs of pension provision, regardless of vehicle used, and come to an agreement with the trustee about how to resolve that issue. When the company and trustee come to an agreed position then the master trust can be a way of achieving the agreed outcome.
Could there be changes afoot?
The DWP launched a call for evidence in December 2016 titled ‘Bulk transfers of defined contribution pensions without member consent’. In it there is an acknowledgement that the existing provisions, originally intended to support DB transfers, do not work as well when considering DC benefits. In respect of the actuarial certification required for such a transfer, the current provisions on broad equivalence are generally considered difficult to interpret; indeed we see actuarial practices and legal advice varying widely. Responses are requested by 21 February 2017 and any changes will no doubt take some time to come through. Nonetheless we can hope that the outcome is to simplify and clarify the process so that companies and trustees have more certainty about what needs to be done.