MASTER TRUSTS
Best practice model or unproven prototype?
It is clear that the Pensions Authority (PA) and many pension providers view Master Trusts as a key tool in delivering cost effective and well governed pension schemes for Irish savers. Indeed, delivering on the PA’s long stated goal of radically reducing the number of Irish pension schemes from circa 80,000 schemes to less than 500 can only be achieved if the Master Trust model is widely adopted.
Can Master Trust fundamentally change the pension landscape in Ireland for the better or is it a savings product that is superficially appealing but ultimately won’t deliver in practice for Irish pension savers? Our view, and we accept it is early days, is that Master Trust will have a key role to play in the future of Irish pensions. However, it will not be the answer for all DC schemes.
Although Master Trusts have been around for many years and arguably there is proof of concept, they are evolving to fit the IORP II landscape. While the PA Report in 2020 was less than complimentary about aspects of the Master Trust model, particularly the level of independence from the sponsor, we believe the situation has improved. This is largely due to an effective engagement process between Master Trust providers and the PA over the last year. While no model is perfect, we now believe Master Trusts are on the right road to addressing key PA concerns.
Our view is that Master Trusts will have a key role to play in the future of Irish pension. However, they will not be the answer for all DC schemes.
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THE PROS AND CONS
The benefits of Master Trusts come mainly from scale. A grouped solution like a Master Trust, which can potentially grow to hold billions of euros in assets,
has the buying power to offer:
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access to ‘best in class’ investment solutions
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lower costs/charges
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best practice governance models
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high-quality communication and projection tools
Crucially for many Trustees and sponsors, a Master Trust will provide a structure to effectively manage the costs and risks associated with IORP II compliance. From a member perspective, the ‘big win’ is that all of these benefits should, over time, result in higher, more secure retirement savings.
There are, however, also downsides to Master Trusts. A grouped solution inevitably means less ability to tailor the offering for individual scheme needs. This may particularly impact larger schemes who may already enjoy some of the benefits of scale and are more likely to have bespoke communications and investment strategies that specifically address their members’ needs. A move to a Master Trust arrangement, therefore, may serve to ‘anonymise’ an employer’s pension offering and negatively impact their ability to attract and retain talent.
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In addition, larger schemes are more likely to be able to absorb the high fixed costs associated with IORP II thus making the argument for transitioning to Master Trusts less compelling.
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The scale and resulting buying power of Master Trusts should, all other things being equal, result in better outcomes for members albeit with a loss of control and influence at an individual sponsor and member level.
THE TRANSITION TO MASTER TRUST
Trustees and sponsors need to fully understand the implications of moving to a Master Trust model and, in particular, what the exit strategy might be if things don’t work out. There is inevitably some loss of control given a Master Trust is run by trustees who are unconnected to the current trustees and sponsor. We believe that most sponsors will look to establish an oversight group to ensure that the Master Trust continues to deliver for its current and former employees.
Transitioning to a Master Trust remains a real challenge for Irish pension schemes and providers alike. The existing ‘wind up and bulk transfer’ model is complex and costly, despite recent changes and may take years to complete across the industry. This will likely result in schemes ‘queuing’ to transition to Master Trust and potentially lead to delays in IORP compliance. We understand that the PA may be considering further ways to simplify the transition process and any changes in this regard would be widely welcomed.
Looking further afield, we have seen the move to Master Trust growing considerable momentum. In the UK they have been widely used for auto-enrolment and for general DC consolidation. Australia and New Zealand have also successfully transitioned to Master Trust arrangements for many of their schemes.
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The transition to Master Trust is complex and costly and may take years to complete across the industry
OUR VIEW
On balance, we think there is much to commend the Master Trust model - particularly for small to medium size DC schemes. It will not be for everybody, and any decision needs to be carefully thought through.
Trustees and sponsors need to recognise that this is a critical strategic decision that cannot be easily undone and will directly impact member outcomes for years to come. We would urge Trustees and sponsors to take independent advice - not just around whether they adopt the Master Trust model but also in choosing a provider that can best address members’ needs.
If you would like to discuss the Master Trust option in greater detail please contact
Keith Burns keith.burns@alignadvisory.ie or
Brian Griffin brian.griffin@alignadvisory.ie.
On balance we think there is much to commend the Master Trust model. However, it is a critical strategic decision and should not be taken lightly.
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