The debate over whether trust or contract pension arrangements are superior is decades old. Yet with such a high level of regulatory change, product development and scale on the master trust side, the answer to the question is evolving.
A marked preference for trust-based arrangements was evident at a recent Corporate Adviser round table – The Rise of the Master Trust – Can Anything Stand In Its Way? – amongst a group of delegates from firms typically dealing with employers at the larger end of the scale.
This perception that trust-based arrangements perform better partly reflects increased engagement from employers, leading to better outcomes, said delegates.
Willis Towers Watson senior consultant Mark French pointed out that the benefit of a trustee board gives ‘filtering of a complex choice to best of breed’ alongside governance, fiduciary oversight and better communications and buy in from the employer. “All these factors play a role in increasing the attraction of trust schemes,” he said.
The process of shifting to taking an income was also seen as crucial, with master trusts on course to evolving towardsa solution that could give institutional pricing levels to those taking benefits, although we are not fully there yet.
PwC head of defined contribution consulting Philip Smith said: “I think it depends on how much friction there is on the journey, depending on the type of product. If you disinvest and then you reinvest, that is going to cost you money.”
Hymans Robertson head of DC scheme design and provider evaluation Jesal Mistry added: “The end point makes a big difference. Master trusts have an advantage, as something that can be ‘to and through’ to drawdown. Your investments stay as they are, and often the charging structure stays the same into that decumulation period.
“Master trusts will come into play because of the future-proofing element that comes with it, because they deal with the journey into retirement,” he said. Participants also tended to regard master trusts as providing more flexibility to deal with challenges such as shifting from lifestyling designed around annuitisation.
They suggested the two regulatory regimes remain very different despite TPR and FCA’s joint statements proclaiming regulatory alignment. They also noted that the new environmental, social and governance requirements coming in next October would apply to trusts but not to GPPs.
Smith added: “Trust-based should deliver a better outcome. Trustees have a fiduciary duty to look after the member and run the investments. With a GPP, the provider has got to provide an IGC, but really it is just a product.”
Mistry added: “The other aspect is the use of scale to drive down costs, to ensure the investments are performing well, and administration. Trustees have a core oversight function and the ability to challenge that.”
Yet Barnett Waddingham client relationship manager Martin Willis added that you couldn’t simply take it as read that the trust route was always best. “It is not black and white. It is perfectly possibly to have a GPP delivering good member outcomes. You can have a governance overlay, albeit it is not quite hardwired in to the product as it is with trust-based schemes.
A lot of trust-based schemes at the smaller end, because they have not been looked at for ages, maybe it is a hybrid scheme and DC does not get enough attention, maybe those aren’t producing good outcomes.”
Security of assets
Panellists weighed up various issues with security of assets. French noted the significant scrutiny life offices come under – with credit ratings and the Solvency II requirements, giving savers in life office master trusts the benefit of both TPR and FCA regulation.
But Mistry argued some master trusts remain opaque and noted a grey area in terms of the deauthorisation regime. He said there was a host of questions such as where trustees sit in the credit pool, the structure of the underlying funds, where they sit on a platform and who the custodian might be.
Smith said: “For me there are two different questions. You could end up with a master trust getting into trouble, but the assets are totally secure.”
Mistry pointed out that while you technically get more comfort from a life company, if one did fail, a vertically integrated solution could mean problems all down the line whereas a more unbundled type of structure would mean all the eggs had not been placed in one basket.
Willis added: “It is a real rabbit warren when you start looking at this. You go into huge depth and ask is everything secure, and the answer is, it might not be, though at least we have looked at it.”
He also queried the potential requirement to communicate to members who holds what and what might happen if they failed. “To start with, it is bafflingly complicated, and if you do understand it, it scares you.”
Panellists also considered the quality of performance information available, which was felt to be lacking from some master trusts.
Mistry said: “The insurer master trusts have the same infrastructure as the GPP, so the investment reporting etcetera is all done through the same structure. All that is available through third party systems too. But there are providers where it is more difficult. You have to ask them for information. Some may not make their investment solution information easily available.”
Panellists suggested that with a master trust pool of assets and a high contribution flow, you can do things that you can’t with GPP assets while having the advantage of scale. This could be achieved for drawdown as well as accumulation, said delegates.
Yet others suggested that it might be too early for us to see the full benefits of what may be possible. Smith said: “Maybe it is too early in the market for this to be transformational. I don’t get the impression that commercial master trustees are pushing for innovation in the way I would see a big DC plan push for say factor-based investing or ESG.”
Aviva policy manager, workplace benefits Dale Critchley added that finding out trustees’ plans for improving the investment approach of the default fund should be possible by looking at the chair’s statement. “If it is vanilla, then challenge it,” said Critchley.
Section 32 scepticism
The debate progressed to look at several important technical issues including the continued use of section 32s. Critchley questioned their use when master trusts are available, and delegates at the event were generally of the view that they would not use S32s.
Willis said: “There are some firms that might say stopping using S32s means changing the template so let’s keep doing trustee buyout plans. Hopefully that is a minority. There is a degree of employer sign up to a master trust. There may be some employers don’t like playing ball.”
Mistry said: “Section 32s are often on the same platforms as GPPs and GSipps and in that sense are similar to those products. They are bit unloved and last resort. If you can get people to a master trust, it is a better solution.
“You may not be able to get a master trust to take on a scheme, if it is not of sufficient quality, to take some assets from a mature older scheme or a with- profits where a buy out or assignment of policy might offer a solution. It is not mainstream, but it might sit there as a last resort.”
Critchley said that there was a perception among some advisers and trustees that it is easier to transfer to a Section 32 with fewer questions and less requirements around communications than a bulk transfer to a master trust.
Mistry said: “If they are making it easier it doesn’t sound like they are looking after things in the right way.” He added: “If the trustees are genuinely looking after members’ interests, things like
governance, investments, functionality, communications, it is hard not to get to a point that a master trust is the right option. If you end up with a S32 you have to question if the trustees have taken the right advice.”
French point out that some providers would have the S32 in the scope of their independence governance committee. There might be charging differences. The fixed priced model that the low cost operators have doesn’t tend to sit well with buyouts.
The net pay conundrum
While panellists clearly believe that there remains a rationale for contract-based schemes in some circumstances, they also heard concerns that GPPs may be offering an easy route to salary sacrifice – viewed as a means of helping employers meet their AE costs while penalising the low paid.
More broadly they also expressed some frustration that most providers did not offer both net pay and relief at source. It was also noted that payroll and pension professionals use the phrase ‘net pay’ to mean relief at source, in pension terms.
French also pointed out the difference in the way providers apply tax relief. “Some apply it straight away – they take on the cost, while others don’t – they apply it when they receive it six week later.”
Mistry said: “Whenever they do it – more need to do it. There aren’t many providers who do both.” Critchley said this required two master trusts – one for net pay and one for relief at source. It might have the same trustee board, but as far as TPR is concerned, a provider would have to authorise two master trusts.
Delegates were asked whether they should, as consultants, make sure both are being offered, because low paid staff are losing 20 per cent of employee contributions in a net pay, while around half of high paid staff could be missing out in relief at source, by not claiming back higher rate relief.
Critchley explained why such an approach would be hugely onerous to implement. He said: “To achieve this you would have to be able to operate a payroll system, which could distinguish reliably which scheme a person is going into and if somebody drops their hours, if they are not paying tax anymore, they would have to switch from one scheme to the other. It is a challenge for employers to get it right for the whole scheme, never mind on a member-by-member basis.” Willis suggested that “salary sacrifice is probably the easy way if you can”.
Critchley said: “The issue is that you create the net pay issue by doing salary sacrifice. The issue with relief at source is if you work part time, earning an hourly rate, which allows salary sacrifice, if you are being paid £10 an hour for 10 hours a week, that is fine, you are not paying any tax. You could be in a GPP getting relief at source of 20 per cent. You implement salary sacrifice, include that person in it and they don’t get tax relief anymore.
“They get a gross amount deducted from their pay, that amount paid as an employer contribution – they get no benefit and suddenly they have lost £100 of net pay rather than £80 of net pay they would have lost previously.
“This net pay relief at source is more complicated by the number of employers who use salary sacrifice. I don’t think that message has got out. Just because you use a GPP, if you also use salary sacrifice, you shouldn’t be sacrificing anyone’s pay if they earn the equivalent of less than the personal allowance. We know of employers trying to recoup the cost of AE have been sold the story of salary sacrifice and are using it for as many staff as possible.”
Mistry pointed out: “There are a lot of employers do it at minimum wage or just above, that doesn’t leave you a lot of leeway.”