The Pensions Authority has expressed a desire to see a wide-scale rationalisation of pension schemes which would result in a reduction in their number from more than 160,000 in 2018 to a few hundred. This will see the transition of many smaller schemes into a relatively new structure known as a master trust.
"A master trust is a pension scheme in which a number of employers participate," says Anita Butler, master trust specialist with Mercer Ireland. "There is a board of professional trustees governing the master trust on behalf of all the participating employers and members. Each plan will typically have its own benefit design. By a number of employers participating in one pension scheme, rather than a number of individual traditional pension schemes, they benefit from the economies of scale achieved by sharing the cost and compliance requirements."
Lower costs are a key attraction. "A master trust offers each participating employer, irrespective of their size, strong professional governance and simplicity of administration but with generally lower operating costs relative to a single-employer trust, which requires its own trust deed, rules, and trustees," says Declan Maher, head of corporate pension and risk sales with Bank of Ireland Wealth Advice and Distribution.
These structures are already well established in other jurisdictions. “What we see in a number of markets is insurance companies, pensions companies, employee benefits firms and industry groups setting up master trusts,” says Alistair Byrne, head of EMEA pensions and retirement strategy with State Street. “In some cases they will provide all the services themselves, while in others they will buy in in services like administration in an outsourced model. The master trusts can be open access or restricted to certain types of employers or industry groups. We are seeing more open-access arrangements now.”
He highlights two key advantages: improved governance and reduced costs. “A lot of employers are signing up for master trusts. They are using them to reduce the regulatory burden that sits on them.”
Maher sees very few disadvantages. “Unlike a traditional single-employer trust, where the sponsoring employer has discretion to select its own board of trustees and devise its own specific trust deed and rules, the master trust arrangement has its own professional trustee company with its own rules, but I don’t really see this as a disadvantage, it merely simplifies decisions and ensures professional trustees are in place.”
Co-governance
Some might say that as an issue though. “It’s a bit of a one-size-fits all proposition,” says Byrne. “If there is something particular about membership of a scheme a master trust might not be able to cater for that. In the UK we have seen a model of co-governance where the master trust opens up a new section to allow for the proposition to be tweaked. Sometimes there is a feeling of a loss of control, but you are getting economies of scale in return for that.”
That may lead to some employers continuing to go it alone, according to Irish Life head of products Shane O'Farrell. "Historically some employers want to be quite active in their pension schemes. That will cease under a master trust arrangement. A lot of longer-established occupational schemes will stay as they are for that reason, but a master trust will be the default option for most new schemes regardless of size."
Some schemes won’t have the luxury of choice, however. “The IORP II directive will be a significant driver,” he adds. “Master trusts have existed for some time but there has been real carrot or stick before now. But now the regulatory and governance standards bar is going to be raised so high that many schemes will have to move to master trusts to survive.”
But it may not be as simple as that. “They are increasingly used by companies arranging pension benefits for the first time,” says Maher. “For existing defined-pension arrangements, the transfer from a single employer trust to a master trust involves the wind-up of the current scheme, which incurs costs. It is also a complex process requiring changes in legal documentation and member communication. The fact that IORP II has been delayed with legislation not yet finalised, has left many existing providers adopting a wait-and-see approach.”
Byrne agrees. “The transition needs to be made easier, it should be made simpler and more straightforward. We know there is a consolidation agenda in Ireland but if there are too many requirements on transition it will hold that back. Also, if a company has both legacy defined-benefit and defined-contribution schemes and are quite happy running both they may continue with them. In some cases you might see a buyout of the defined-benefit scheme to facilitate a transition. There will absolutely be greater adoption in future, but transfers will have to be made easier if the regulator wants to drive that.”
Pressure on employers to provide high-quality, cost-effective and efficient retirement savings solutions for their employees while complying with ever-increasing governance and regulatory requirements has led to a resurgence in the use of master trusts in this country, according to Butler. “We expect this trend to continue,” she says. “While master trusts currently represent a small percentage of the pensions market in Ireland, it is likely that they will become the vehicle of choice for defined-contribution pension schemes in the near future, based on experience in other pension markets. For example, in the UK the majority of defined-contribution pension schemes invest in master trusts, and many well-known Irish companies have already adopted a master-trust model.”
Maher concurs. “We expect to see greater adoption of master trusts in the coming years as sponsoring employers look to reduce costs, reduce risks and maintain or provide greater governance and investment oversight. Pension providers clearly recognise these issues and have been increasingly introducing master trust offerings as part of their employee benefit solutions.”