Master trusts: The growing trend for outsourcing DC pensions
Master trust DC pension arrangements may have erupted in the UK in the last few years but with all the noise around the proliferation of small trusts that are aimed at SMEs, the bigger picture for larger companies seems to have been lost. Stuart Reid and Louise Williamson highlight how using master trusts for company DC plans is an incredibly simple way to reduce the cost and risk of DC pensions for the sponsoring company.
Corporate pensions have never seen so much flux in the UK. New legislation and regulation designed to improve the sustainability and flexibility of DC pensions for UK employees continues to come at a relentless pace. Companies that run DC plans internally, or ‘in-house’, have to adapt their plans and communicate these changes as wave upon wave of reform hits their company’s pension plans.
If a company runs its own pension plan, new regulation and legislation require fresh communication efforts that are targeted at members. Crafting, designing and delivering those compliance-driven messages incurs significant costs. Changes to benefits require changes to the underlying administrative system, which again incurs costs.
Technology-driven administration and communication systems also require almost constant investment. In short, the costs of running pension schemes are rising, for a benefit that is less and less perceived as important by employees. This financial and operational burden is on top of the regular administration and communication efforts companies need to conduct for all their members – existing, legacy and those who have entered retirement.
This disconnect between the cost of provision and the perceived value of the benefit is solved by providers of master trusts. By outsourcing all aspects of DC pension provision to specialist third party providers (master trusts) companies can save money and avoid the one-off costs associated with regulatory and legislative change. Annual or ad-hoc fees paid to investment consultants or actuaries become part of the fee met by members, which is usually substantially lower than a plan’s current total running costs – and with no potential for volatility from either internal pension management problems or external marketplace issues.
The good news for finance departments (that intuitively understand the logic of outsourcing non-core corporate functions to specialists, which can provide a better service at a lower cost due to economies of scale) is that increasingly DC plan trustees are seeing the logic of using master trust providers to provide DC services to their members.
Many master trusts have specialist administration and communication businesses that have invested in market-leading technology and can provide a low-cost service that matches – and in many cases exceeds – the quality of a company’s in-house pension plan. These third party solutions can also enable companies to keep communications branded by the sponsor company. This can help with integration with the broader employee benefits and communication package and smooth the transition for members.
Master trusts not only provide a more efficient and effective pension framework but additionally by utilising the increased scale of multiple companies’ DC plans they are enabled to negotiate better terms in the marketplace from investment managers. Willis Towers Watson’s master trust LifeSight has negotiated investment fee arrangements that are significantly lower than is typical of individual employer arranged plans. These savings can then be used to offset any administration costs passed from the company to the member. Willis Towers Watson has worked on transfers of legacy and existing pensions to master trusts that have generated savings for both the members and the company: the trustees have been happy to sign off on the changes because their members are being charged no more, or even less, while the company has retained all of the fee savings to either lower the total costs or to provide other benefits (that are perhaps more appreciated) to employees.
Master trusts’ economies of scale not only enable cost savings of investment management fees – they also enable the advisers and trustees of larger portfolios to be smart in the design of their default and available fund range.
There are other benefits to master trusts. For example, DC pension plan members that are part of LifeSight have access to online retirement savings modelling tools that enable individuals to project current savings – assets and contribution rates (including pension assets from outside the plan) – against desired retirement age and see how expectations match with likely outcomes. These kinds of financial modelling tools have huge appeal to many employees with DC pension plans but are often unviable in terms of either development or ongoing maintenance costs for individual companies.
In the past, companies that wanted to outsource DC pension plans to third parties – and many did – had to go to the insurance market for a GPP or stakeholder arrangement. However, this was often an unsatisfactory option for companies and/or plan trustees who saw a fundamental misalignment of interest between the plan members’ interests and the insurance companies’ responsibility to maximise value for their shareholders. Master trusts, with their independent boards of trustees, have no such conflict of interest. This enables companies to seek agreement of their trustees to transfer both existing and legacy arrangements – meaning outsourcing strategies are more complete and the cost and risk advantages greater and final. LifeSight has five fully independent trustees that oversee all members and has been independently recognised through accreditation as having a stringent governance system. This ensures trustees feel confident that they are executing their responsibilities when agreeing to transfer a DC plan, while enabling finance departments to lower the cost and risk of provision.
The marketplace for DC pensions – and in particular master trusts – is changing rapidly and there has been much confusion caused by the proliferation of plans for a fragmented pensions market. However, as the dust settles there is beginning to be a growing appreciation among companies with significant DC pension arrangements in place, that outsourcing those plans will provide the company with a better service for employees at a lower cost and with reduced operational risk. The fact that DC plan trustees are increasingly agreeing to the transfer of plans to master trusts shows that these solutions really are a win-win for everybody. The leading providers – such as Willis Towers Watson – will grow more quickly and their plans will enjoy greater and greater economies of scale. So while the logic of master trusts is undeniable, the biggest issue is ensuring you choose a solid, reputable partner for your pensions that will be a marketplace leader for years to come.