Sustainability or value? Navigating the pensions maze

While many have a preference for trustee-based pension schemes, the cost of running an own-trust scheme has sky-rocketed in recent years, leading to the growth of master trusts, but they are not always the best option, finds Edmund Tirbutt

The use of master trusts and interest in environmental, social and governance (ESG) investing are both major pensions trends, and new regulations have created a measure of overlap between the two.

But a master trust isn’t always the best option, and HR departments must consider the alternatives available to them.


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The basic choices

Company pension schemes fall into two basic categories. Those governed by a board of independent trustees and ‘contract-based’ schemes, like group personal pensions (GPPs) which, instead of having trustees, just have an independent governance committee which reports back to the provider. 

The ability of trustees to offer a layer of independent oversight has attractions both for employers and employees, but the costs of running an own-trust scheme have become increasingly prohibitive, particularly because of increased regulation.

Gemma Burrows, a director in the retirement practice for specialist intermediary Willis Towers Watson, says: “The time and cost involved with operating own-trust arrangements has been going through the roof. Trustee knowledge and understanding requirements are very hard to keep up with, and many trustees will have other jobs.”

Employers with own-trust schemes who want a more cost-effective alternative with the advantages of independent trustees have therefore been increasingly switching to master trusts, which enable them to share a board of trustees with other firms.

Sean McSweeney, employee benefits team director at specialist intermediary Mattioli Woods, says: “Master trusts effectively enable you to outsource the trustee function. You still have a board of trustees whose number one priority is to look after the interests of members but without the fiduciary and admin hassle and cost.

“On average I think it would cost at least £15,000 a year to run a small own-trust occupational scheme, and a lot more for big schemes. But master trusts cost no more than a contract-based scheme.”

Much of the switching away from own-trust schemes has already taken place but, according to figures released this March by The Pensions Regulator, there are still 1,560 defined contribution (DC) schemes with above 12 members left.

Furthermore, Willis Towers Watson research published this July finds that 61% of employers that continue to run their own trust-based pension arrangements may consider a move to a master trust in the next two years.

Some could be motivated by greater investment flexibility as well as cost-cutting because master trusts, which typically have 15-20-strong fund ranges, tend to offer slightly more fund choice than own-trust schemes.

They are also more likely to allow employees to drawdown on their funds, using the new pension freedoms introduced in 2015.


Different master trusts

Master trusts that have sprung up on the back of auto-enrolment, like NEST, the People’s Pension and NOW: Pensions, tend to offer more limited fund ranges and deal mainly with smaller organisations or with particular cohorts from larger companies.

They are not without their attractions. For example, NEST is government-backed and has achieved commendably consistent investment performance. But they have fewer bells and whistles and are harder to bespoke than some of the master trusts aimed at larger employers.

McSweeney says: “Willis Towers Watson’s master trust is a fantastic product and was one of the first to fund regulated advice for employees at retirement. Standard Life’s is also excellent, with good pricing, communications and admin, and I feel the Scottish Widows one has the potential to shake up the market.

“The Legal & General master trust, which is one of the largest, is quite vanilla, with a limited fund choice. But its communication is excellent and it’s doing some interesting work on ESG.”


Master trusts and ESG

April 2021 Standard Life research finds that 60% of its pension scheme members feel it important to consider the social responsibility of the companies being invested in, and a further 57% want the impact of climate change to be considered. Recent regulatory requirements specific to the trustee market have also made master trusts focus on ESG issues such as climate change.    

Since 2019 trustees have had to publish information about their polices on financially material ESG factors, and from 1 October this year they must comply with the Task Force on Climate-related Financial Disclosures (TCFD) governance requirements.

Stephen Budge, principal at specialist intermediary LCP, says: “From October all pension schemes larger than £5 billion as well as master trusts of all sizes have to set measures around climate change, set targets, start reporting on metrics and up their game from a governance point of view on climate risk.

“The main master trusts have therefore been focusing more on climate change during recent months, and also, to a lesser extent, on social and governance issues, and particularly with regard to default funds.”

"From October all pension schemes larger than £5 billion as well as master trusts of all sizes have to set measures around climate change, set targets, start reporting on metrics and up their game from a governance point of view on climate risk"

For example, Scottish Widows, which last year committed to divesting at least £440 million from companies that have failed to meet its ESG standards, now offers six self-select ethical and sustainable funds in its 19-strong fund range. But other types of pension scheme may soon close the gap.

Budge continues: “The regulations currently also apply to own-trust schemes of above £5 billion but in 2022 they will be extended to schemes with above £1 billion. They could also extend to contract-based schemes in due course, but there’s no timeline at the moment.”


Choosing the right scheme

Not all experts feel that the head start enjoyed by master trusts on ESG is a deal breaker or, indeed, that master trusts are always the right solution for every business.

Steve Herbert, head of benefits strategy at Howden Employee Benefits & Wellbeing, says: “In my opinion the idea that trust-based schemes are more ESG friendly is a bit of a misnomer. Most GPPs have several green funds plus one full ESG option, and employers with GPPs can include an ESG default fund. Because it’s not a trustee decision, they have more ability to influence such things.”

GPPs can be comparable with master trusts in terms of fund ranges and other factors like service standards and added-value features so, the arguments between the two can be finely balanced. Even the idea that it’s easier to sell a master trust to a workforce because they will still be getting a trustee board could be becoming outdated.

Herbert continues: “Typically those going for master trusts may feel they offer a more comprehensive service but that’s not necessarily the case when you look under the bonnet. Most GPPs in fact have tools every bit as good and modern as master trusts. The only real significant difference is that with master trusts the control rests with the trustees, but with contract-based schemes it essentially rests with employers and employees.

“In my experience many companies, particularly smaller ones, want to feel they have complete control over the scheme and so prefer a GPP. I also find it doesn’t really matter to employees where the legal responsibilities lie.

“Some may prefer to have trustees but just as many are happy to have the responsibilities resting with their employer or with themselves. Increasingly they are trusting employers to consider the issues and make the right decisions.”


Asking the right questions

HR departments considering switching from own-trust schemes should avoid preconceived ideas and focus simply on selecting a pension scheme that meets their specific objectives – whether it’s a master trust or contract-based.

For example, does it communicate well with employees and provide stellar returns? What tools and other support does it provide employees to help with their long-term saving? How do you rate its governance and service standards, and is its ESG philosophy in line with yours?

A specialist intermediary can help with selection but, if master trusts make the shortlist, consider whether you are likely to get on with the trustees. Relationships are crucial because master trusts can seem more like an extension of an HR department or benefits team than an external provider.


This is part one of an article appears in the September/October 2021 print issue. Subscribe today to have all our latest articles delivered right to your desk.