by Lee Hollingworth, Head of DC Consulting, Hymans Robertson
While this may be true for many employers it is also true to say that other models, such as an employer trust scheme still have a role to play in the right circumstances. It’s not black and white.
Auto-enrolment aside, it is undeniable that the pace of employer based trust schemes moving to Master Trusts has accelerated over the last two years. But why? This can be attributed to the following three reasons:
Cost: Many employers are now having to write a cheque to pay for the scheme running costs for the first time. This is due to the abolition of short services refunds in 2015.
Regulation: Increased regulatory responsibility – the DC code of conduct, including the need for an annual chair statement and VFM assessment.
Contribution rates: Auto-enrolment moves into a steady state of 8% from April 2019. Pensions will become less of a differentiator and more of a hygiene factor unless the employer has a budget to offer higher contributions than the statutory minimum. The effect of this is that employers are seeking to outsource the pension benefit to a third party and focus their efforts on other benefits.
These are all valid reasons to consider a change, but I would argue that while Master Trusts can often be a good option, employers shouldn’t always assume they are the only option. As I said the answer isn’t always black and white and sometimes remaining in a trust based arrangement can be the better option.
How you ask? Let me address the previous three reasons to explain:
Cost: Shifting to a Master Trust can save costs, but the same outcome can be achieved by simply bundling the service delivery to a third party – a bundled trust solution.
Regulation: Increased regulatory responsibilities – the truth is that by taking a pragmatic approach trustees can still meet their regulatory responsibility without incurring undue cost or risk. In addition, in our experience most large employers will establish their own governance committee to run alongside the Master Trust thereby negating the benefit.
Contribution rates: While it may be harder to differentiate a scheme through contributions, the fact is two-thirds of employees are not on track to retire comfortably*. Employers can differentiate their scheme through a moderate additional investment designed to improve engagement.
I think we will continue to see a rise is use of Master Trusts, and that’s no bad thing, yet they are definitely not the only option, a trust based approach can often be the best way forward for employers too. So all roads don’t lead to Master Trusts, there is a fork, where you’ll need to consider carefully which option works best for you and your scheme members.
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