Royal London has published a new policy paper, aimed at employers, which sets out the the relative merits of both master trusts and group personal pensions.
The company said this report is aimed at employers reviewing their current pension arrangements, now that all auto-enrolment staging dates have been passed.
Royal London says a steadily growing ‘secondary market’ is emerging with some employers looking to switch pension providers. This may be due to poor investment performance, administrative problems or poor member engagement.
According to figures from The Pensions Regulator in 2017/18, there were around 53,000 employers (employing more than 30 staff) who used a master trust. In contrast there were 33,000 employers of the same size using GPPs. However these same figures show that average contribution levels into GPPs were higher.
This new report set out the key differences between these two type of pension arrangement and explains the issues, which employers may want to consider in partnership with their adviser.
Topics covered include
- Charges: most GPPs operate a flat percentage annual management charge, whilst some master trusts have a more complex structure, involving a one-off contribution charges (Nest) or a fixed monthly fee (Now: Pensions), in addition to an AMC.
- Governance: with a GPP members’ interests are overseen by an independent governance committee (IGC) which publishes an annual report, and has powers to refer concerns to the FCA. In contrast members’ interests are looked after by a board of trustees with a master trust. These trustees have a fiduciary duty to members. Royal London points out there have been some concerns raised by the FCA about ‘vertically integrated’ master trusts where a company providing advice to firms also promotes its own ‘in-house’ master trust solution.
- Tax relief: with a GPP members receive tax relief through the ‘relief at source’ method, ensuring all members automatically receive tax relief at the basic rate. With most master trusts (excluding Nest) tax relief is delivered through the ‘net pay’ arrangement, this can disadvantage lower earners, who are automatically enrolled once their salary exceeds £10,000 a year, but don’t pay tax until their salary exceeds £12,500 (the current personal allowance). These workers are effectively missing out on the tax relief available to those in GPP arrangements.
- Retirement options: Royal London says most trust-based pension schemes were designed for a world where the usual outcome at retirement was to buy an annuity. Many master trusts are now improving their drawdown offers to ensure members can benefit from pension freedom. In contrast, most GPPs already offer a relatively smooth transition from the period where a worker is building up a pension to the process of taking benefits.
Royal London’s director of policy Steve Webb says: “It is a healthy sign that employers are keeping their workplace pension arrangements under review and looking to make sure that the scheme they used to fulfil their auto-enrolment duties is still fit for purpose.
“Both master trusts and GPPs have important roles to play and there are examples of high quality in both types. But employers need to understand the strengths and weaknesses of each, and we hope that this guide will assist them in that choice. Employers and their advisers need to make sure that the features of their chosen scheme are helping workers to get the best pension outcomes”.