While there are undeniable benefits to mastertrusts, I believe the decision to use a mastertrust or not is a complex one, there are very good reasons why this option might not be chosen.
First, a bit of disclosure is necessary. I am a director of a company which currently provides services to several mastertrusts while also providing independent trusteeship of stand-alone pension schemes allowing to operate efficiently and cost effectively on their own. In effect I have a foot in both the mastertrust and stand-alone pension scheme camp.
With these compensating biases disclosed we can get to the meat of the matter. Why don’t schemes favour Mastertrusts more?
I believe there are three main reasons why mastertrusts are not flying out the door; who makes the decision? What are the benefits? and what are the alternatives?
Nowadays a pension scheme is typically run by a professional trustee who is charged with collecting in the contributions and investing them safely and wisely to deliver a good retirement for the members. In the normal course a scheme trustee does not have the power to look at alternatives to the scheme.
Therefore, the mastertrust option can only arise if the employer puts it on the table. The employer however does not normally have the ability to move the existing scheme to a mastertrust. That decision rests with the trustee. This creates a dilemma. For the employer to get maximum benefit it needs the accumulated value of the existing scheme to transfer to its chosen mastertrust.
For the trustees however the situation is much more complicated as a move to a mastertrust would require them to conclude that they, the trustees, will never be needed again. In essence they must make themselves redundant.
Some Employers can force the issue by winding-up the existing scheme – but that can be perceived as attacking members benefits. If an employer still bears scars from the demise of a Defined Benefit Scheme, they won’t want to go down that road.
Even if the employer does wind-up the scheme (and thus end the role of the trustee) the trustee must still decide where the existing benefits go. The options will include Buy Out Bonds and PRSAs as well as the full range of mastertrusts in Ireland and internationally. There is no guarantee that the trustees will reach the same conclusions as the Employer.
Given the potential to upset employees and fall out with trustees many employers will be wary of moving too quickly on this point.
The second question that arises with mastertrusts – are they a better option? Often touted merits are cost saving and reduction in employer involvement. The latter is a double-edged sword. If an employer is paying that much money for a benefit they will want to be involved. Also, if you no longer have independent trustees of your own scheme – who will monitor the performance of the key function holders such as the investment managers? This work will automatically fall back on the employer.
One of the commonly recognised benefits of mastertrusts is reduced costs. Some costs that are currently borne directly by the employer (for example trustees fees) will now be paid by the mastertrust. However, this may result in the member paying costs, albeit at a lower level, that had previously been paid by the employer. If the members aren’t better off then this option won’t wash with the existing trustees, the employees and indeed trade unions. An easy solution to this problem could be for the employer to sweetens the pot – increasing the benefit for employees and deferred members. However, this will reduce or eliminate the cost saving for the employer and may actually be more expensive in the short term.
Another feature of mastertrusts that will cause employers pause for thought is – the track record and security of mastertrusts. Many of these are recently created vehicles which are adequately but not excessively capitalised. It is a big decision to say such an entity offers a better option than a long-established insurance company with billions in capital and a decades long track record.
Overseas experience would suggest that mastertrusts will become a bigger part of the Irish pensions landscape. The same sources would also suggest that other options will also prosper. It is vital for employers in the first place, and trustees in the second place, to make their decision properly, to not simply assume the option being touted is the best available, to seek independent advice and to be aware of the alternatives.
Author: Eoin Hassett, Independent Trustee Company. For further information, please talk to your Financial Advisor or email firstname.lastname@example.org