As more companies begin to review their master trust provider, the secondary master trust market is coming more into focus.
However, unlike the familiar single-employer trust to master trust market transition (with its well-oiled processes), the secondary master trust market is relatively untested. The role of ceding trustees, beyond the approval of any bulk transfer of members’ assets, is therefore unclear.
There are similarities between moving from a single employer trust to a master trust, and moving from a master trust to another master trust. These include trustees approving the transfer of assets once they are satisfied there is no detriment to all members, and agreement on how to deal with transactions in process, such as the bereavements process.
However, there are also some key differences, which could hinder a seamless move.
Selection process – who’s involved?
With single employer trusts, usually a decision has been taken by the employer to move, often to reduce the cost and resource needed to provide the independent governance. Once that decision to change has been made, the trustees will work hand-in-hand with the employer, normally through joint working groups, to agree a suitable master trust.
The ceding trustees are usually involved throughout the selection process, including meeting the master trust trustees. And ultimately they approve any transfer of assets, once satisfied that members will not be disadvantaged.
Moving from one master trust to another, however, is different. Here, the rationale for a review of master trust provider could be due to issues with the provider – including service levels, a lack of innovation or concern over their commitment to the market.
Or employers may simply decide to review to see what else is available in the market, and whether employees could benefit from a move. Either way, the employer is unlikely to engage the ceding trustees in the selection process.
Instead, the ceding trustees could be brought in at the end of the process, to agree that another master trust is likely to provide equal or better value to members than the one they have the fiduciary duty for. This could create unforeseen complications.
Untested waters
Imagine the scenario where an employer, working with their adviser, decides to move to a new master trust and the ceding trustees do not approve the transfer of the existing assets.
This could result in the members having two separate pots and needing to decide whether to consolidate into the new master trust. Inevitably, some members will be left behind, irrespective of how good the communications and process are.
There is also a question around which members to move to the new master trust. An employer might want to move just their employees (active members), if this can attract better charges. But the ceding trustees need to consider the impact on all members from the proposed transfer.
An increasingly important issue is the ability to accept crystalised benefits into a master trust, ensuring that no members are left behind. With many master trusts offering decumulation solutions, if the new master trust can’t accept these members into the scheme and also allow them to continue to contribute, then you could be jeopardising an employer’s employee reward proposition, not to mention a question around value for those members.
And what happens if there is a blocker to ceding trustees being able to do a value for money (VFM) assessment to make the judgement call? VFM assessments take time and have associated costs, given the work involved from the trustees and their advisers. Do providers absorb these costs? If not, then who pays? Some employers might not be able to.
Removing barriers
Many issues remain unresolved. With trustee discretion around the decision to approve the transfer, could the new VFM framework offer a solution to support the secondary master trust market?
And could regulations change, so that if you move master trust provider you need to move for all members and not pick and choose to get the best terms?
Perceived conflicts of interests aside, engaging the ceding master trust trustees much earlier in the process could also
be helpful.
As Caroline Escott, one of our Master Trust trustees, says: “As activity in the secondary market increases in the years ahead, it’s vital that ceding trustees are fully involved and act independently. As they will have been doing previously, trustees need to have all members front of mind and avoid being influenced by the ceding provider in their decision to approve any bulk transfer. An open and transparent process across all parties will be critical.
“Ultimately, however, we need to look beyond the master trust trustees. To ensure a well-functioning secondary master trust market we, as an industry, need to work together to remove friction or barriers from the process.”
