Essential Elements: The Master Trust
21 April 2021
Outside of the pensions industry, many will be unfamiliar with the concept of the master trust. As the name suggests it is a type of occupational pension scheme set up under a trust. Similar to other pension scheme types it requires Revenue approval, to obtain exempt approved status and it must be registered with the Pensions Authority. The master trust is set up so that it can utilised by multiple employers that are unrelated to one another. Under this structure each employer has its own ring-fenced scheme within the master trust. This contrasts with traditional occupational pension schemes that are usually set up for a single employer or for a number of employers within the same group.
The Pensions Authority undertook an engagement programme during 2020 with a number of master trusts and firms that are looking at establishing their own master trusts. The findings report makes for interesting reading as the Pensions Authority found a number of deficiencies in the operation of the master trusts. In particular, it identified issues in governance structures, the occurrence of conflicts of interest and a lack of business/continuity planning. We consider the findings report in more detail here.
What are the benefits of a master trust?
As master trusts are offered by financial institutions, they offer a professional trustee board which typically takes the form of a corporate trustee. Grouping schemes in this manner removes the need to have a separate trustee for each scheme. This also removes the trustee burden from the employer and ensures that the employer does not have to concern itself with trustee training.
All of the functions of a pension scheme such as administration, investment and member communications are dealt with by the master trust provider. Employers will still retain control of some aspects of their scheme such as the level and frequency of contributions and the method by which contributions are paid. There is a financial benefit as well, with both employers and their employees benefiting from economies of scale. Many master trusts also provide life assurance and income protection.
Some potential downsides to the master trust
In its findings report, the Pensions Authority identified a number of issues experienced by master trusts. In some instances a clear conflict of interest was noted where the board of the corporate trustee of the master trust was populated entirely by employees of the founding institution. It also identified instances where the trustee was prevented from replacing the scheme administrator which was also a group company of the founding institution. There is no doubt that where only one group of related companies provides all of the services for a scheme, the potential for conflicts of interest increases significantly.
It could also be argued that the range of investment choices open to stand alone schemes is greater. In some master trusts, the schemes must invest in the founding institution’s proprietary funds only. This means that there is an element of concentrated risk for the employees’ benefits.
Joining a master trust
Where an employer wishes to join a master trust it will usually be necessary for them to complete a deed of participation and a detailed application form. Before executing the deed of participation the employer will also be provided with a copy of the master trust’s trust deed and rules. In master trust arrangements as well as stand-alone schemes, the trustee will hold the legal title to the scheme assets. It is essential that a legal review of the trust deed and rules and the deed of participation is carried out on behalf of the employer before any of the master trust documentation is signed or executed.
Though the Pensions Authority has identified a number of concerns in its master trust review, many of the same issues will arise for stand-alone schemes as well. As there are presently only a small number of master trust providers, some commentators have expressed concerns about the possible development of a monopoly. If such practices are identified in the industry they will need to be dealt comprehensively with by the Pensions Authority. For now, the master trust is here to stay and with automatic enrolment on the horizon it remains an appealing and cost-effective alternative to stand-alone schemes for employers. In saying this, it is crucial that a legal review of the master trust documentation is completed before any employer puts ink to paper.
For more information, please contact a member of our Pensions team.
The content of this article is provided for information purposes only and does not constitute legal or other advice.