Strategy & Operations » DB pension schemes: Expanding investment opportunities with a master trust

Switching to a defined benefit (DB) master trust allows companies to have a greater return on investment compared to traditional singular pension schemes, according to Peter Thompson, chair of trustees at Citrus.

“The assets and investments are pooled together [meaning corporates] can have the advantages of having the investment opportunities that are available to larger schemes, which are often better and cheaper than those available to smaller schemes on their own.”

“A DB master trust is a trust set up like nearly all defined benefit pension schemes. Instead of it being for one employer and its subsidiaries, it’s for a group of employers that are not associated with each other,” says Thompson.

“It has lots of sections and there is no cross subsidy between the sections as each has its own membership and its own benefit structure backed by its own assets.”

In fact, 33 percent of FTSE 350 companies have at least one scheme of the size that could benefit from moving to a master trust arrangement, according to research by Hymans Robertson. It also predicted that almost 1 million members will be consolidated into a DB master trust by 2042.

Lower Costs and other advantages

Switching to a master trust means corporates don’t need to worry about the governance burden, as current schemes not only have to find their own trustees but can absorb significant amounts of company management time, says Thompson. Employers may still be able to add an employer nominated trustee to the master trust’s board if they wish.

“The employer can be involved as much or as little as they want,” he adds. Employers will always be involved in agreeing contribution and investment strategy decisions which are key to achieving long term targets.

DB master trusts enjoy lower running costs as administration costs and adviser/audit fees are shared amongst the various sections of the trust.

Compared to some other consolidators on the market, the link between the employer and DB master trust pension scheme is retained in a DB master trust.

“In the commercial consolidator, usually the link [between the employer and scheme] is broken but the employer is expected to pay a lump sum up front which can be unaffordable,” says Thompson.

For DB master trusts, “the employer is still financially responsible for it but there isn’t a large upfront cash payment. If there is a deficit on the pension scheme, the employer will fund it over a period of time in the same way as they would at present”.

Easy transition

The costs of running DB pension schemes have gone up in recent years where a lot of companies find themselves putting in contributions without the fund making any progress, says Thompson.

As such, corporates should make use of pension calculators that are available to check if their current scheme fees are higher than average, and to ensure they’re using the most cost-effective plan and receiving a good return on investment.

Employers considering switching should do their own research and their own due diligence to ensure that it is the right solution for them, says Thompson. The Citrus online calculator can help employers compare their current costs with Citrus costs.

The transfer process from a standalone pension scheme to a master trust may vary, but it’s a smooth, tried and tested exercise, which ensures a cost-effective transition”, he adds.

“The cost will depend on the size of the scheme, the complexity of it, and how it is run at the moment.” As part of the take-on your scheme data is cleansed to facilitate efficient delivery of services for the duration of your scheme’s life.

Regulatory changes

In March last year, the Pensions Regulator published a consultation on the new DB funding code that included an increase in governance expectations, with additional penalties for failure to comply prescribed by law. The code is expected to come into effect in Summer 2022.

Legislative changes mean the regulatory burden is only going to increase and employers with smaller pension schemes may struggle when faced with these pressures, according to Thompson.

“Corporates signed up to master trust schemes will have regulatory changes they need to be aware of communicated ahead of time”, he adds. “And where necessary, the Trustee will take the necessary steps to ensure the master trust complies with ever developing pensions legislation, removing any need for corporates to invest time in Trustee related changes.”