How does a DB master trust work?
Recent additional governance requirements and their associated cost of compliance mean that many companies are reconsidering how best to deliver their legacy defined benefit (DB) pension promises. Cue the re-emergence of the DB pensions master trust as a solution for many sponsors.
A DB pensions master trust is a multi-employer pension scheme for unconnected employers. Assets and liabilities remain segregated, enabling schemes to pool together to benefit from economies of scale, while avoiding cross-subsidies with other schemes. Meanwhile, the link to the employer is not severed, and member benefits remain unchanged.
In this article, we take a look at how DB pensions master trusts can help schemes – and members – achieve their goals.
Robust governance and trustee succession solution
As governance burdens increase and the number of scheme members employed by companies decreases, it can be difficult to find trustees who are willing to do the job, let alone able to meet onerous requirements.
Within a pensions master trust, schemes are managed by professional trustees and other service professionals, taking away day-to-day hassle. This removes the governance burden from the current trustees and provides reassurance that the scheme is being run in a professional manner and is set up to target better outcomes for members.
Outsourced investment management
For many small and medium sized schemes, investment strategy is implemented through a combination of pooled funds.
However, market conditions during 2022, particularly the period following the “mini budget”, illustrated the problems which can arise without a nimble investment governance framework.
A pensions master trust can give schemes access to a diversified range of assets in private and public markets, with environmental, social and governance (ESG) investing capabilities.
A common trustee, investment adviser and asset manager, together with well-defined delegations, and an efficient investment governance model gives a master trust the ability to act quickly when decisions are required. This can help schemes navigate through volatile markets to meet long-term objectives.
Control of cash funding costs
Most schemes are closed to new members and future accrual. The new funding regime means all schemes will need to set a long-term funding objective and requires technical provisions consistent with a journey plan to reaching that objective. A common concern for employers in these circumstances is loss of control – both in risk and cost terms.
A pensions master trust can offer access to a range of investment solutions that are often beyond the reach of small and medium sized schemes. Coupled with a funding approach
that reflects these underlying investments
and is expected to align with the new funding code, it is possible to improve control of cash funding costs.
Reduced running expenses
The Pensions Regulator has published analysis showing that the costs of running small DB schemes are disproportionately high. These costs are expected to increase as small and medium sized schemes navigate new regulations and guidance primarily designed around larger schemes. This also has the potential to take up a disproportionate amount of management time.
Significant economies of scale are accessible via master trusts, which also have greater purchasing power than small and medium sized schemes on their own. Synergies and economies of scale can be passed on to the end client in the form of low fixed running costs.
Efficient path to buyout
Demand exceeds supply in the buyout market. Small schemes often struggle to get adequate attention from providers and may therefore pay a higher price than larger schemes.
Through its size and relationships with insurers, and broader network, a master trust may be able to offer sections a more competitive and smoother buyout process and deliver an accelerated risk transfer at a lower cost.
Moreover, all sections will receive information about the cost of buyout relative to their current assets, thus reducing the risk of overfunding.
Enhanced member experience
Finally, for many people, a DB pension will be the key source of retirement income. A poor administration experience and a lack of financial education could lead to frustration and bad decision-making.
Some pensions master trusts provide members with excellent pension administration including online servicing, as well as free financial education for all members.
If you would like to find out more, to help decide whether a master trust could help your business, please visit our website, or contact one of our pension solutions specialists at DBmastertrust@abrdn.com.