Sponsoring employers and trustees need independent advice on their pension arrangements. Such advice is essential before making any significant change to existing pension arrangements.
Moving to a master trust, or other bundled solution, is often presented as a simplification of existing arrangements. However, before undertaking such a move, employers and trustees need to fully consider the implications as it may impact on all elements of existing pension plan provision.
Taking just the investment element, the range in returns achieved on standard managed funds has been an 24% on the first 8 months of 20201, making a difference of €4.86 million on a €20 million fund. Over 30 years a return of 5% per annum when compared to a return of 4% per annum would make a €20 million difference on an initial fund-size of €20 million2.
Those charged with decision making will need to ensure that proper due diligence, including obtaining independent advice, is undertaken. This requirement applies to all decisions that have a material impact on pension arrangements such as when:
- appointing, changing or renewing investment providers or plan administrators
- transferring to a new arrangement
- winding-up a pension plan
- undertaking periodic reviews of pension arrangements
Below, John Grant of Fitzgerald Actuarial Limited considers the importance of gaining independent advice in order to address conflicts of interest, real or potential, in looking at bundled solutions. While the focus is largely on master trusts, the importance of gaining independent advice as part of performing necessary due diligence is equally applicable to other bundled solutions.
We provide the necessary experience and independence to guide trustees / sponsors through the decisions to be addressed at this time of change in the Irish pensions market.
The Nature and Features of a Master Trust Pension Arrangement
A “master trust arrangement” is a term normally applied to a single pension arrangement overseen by one set of trustees in which a number of companies participate, with these companies unrelated. This is shown in Figure 1 below.
Figure 1 – The Master Trust Plan
The single master trust arrangement is overseen by a trustee board which is responsible for the proper management of the Plan, including the appointment of service providers and compliance obligations.
While participating in a single master trust arrangement, each employer will have its own section within the master trust, allowing for flexibility in terms of design, including rules for eligibility, contribution rates and contribution matching. Depending upon the master trust provider, there may be flexibility on the investment options offered for each employer.
By having its own set of trustees, a master trust transfers the responsibility for oversight and governance matters from individual trustee boards that are often made up of staff and management of the employer, with some arrangements having a corporate trustee company as chair of the trustees. This important feature is seen as an advantage of master trusts. The impending, but delayed, implementation of the Institutions for Occupational Retirement Provision (IORP) II regulations will place more onerous obligations on the governance of pension arrangements which will have implications for trustee boards and associated costs. This may make many individual company pension arrangements unsustainable in their current form.
The Importance of Making an Appropriate Decision
A master trust is a bundled solution, whereby all the services / providers required are selected by a single company (the master trust trustees). The employer(s) and participating members of a master trust are not normally in a position to be able to appoint an administrator of their own choosing, or a preferred investment manager. In moving to a master trust an employer and participating members will adopt the choices made by the master trust trustees.
The decision to move to a master trust arrangement is likely to be far reaching; this isn’t just about changing the investment manager or consultant. This is about a completely different structure in which:
- economies of scale are designed to provide a more cost-effective solution
- any one employer is unlikely to be able to influence the arrangements
- there may be limited scope for tailoring and where available there may be significant cost implications
- responsibility for addressing unsatisfactory elements of the offering rests with the master trust trustees. This may give rise to real or potential conflicts of interest
- If problems with a provider are not addressed to an individual employer’s satisfaction the only alternative may be transferring to a new arrangement; a costly exercise in itself and one that could be more readily addressed within a non-bundled solution
Moving to a master trust, or any bundled solution, may appear to save money, but if you choose the ‘wrong’ bundled solution it will not only prove costly to exit the arrangement, but the impact of underperformance on the members’ benefits and the employer’s financial position should not be underestimated.
In the first 8 months of 2020, the returns available on the standard managed fund offerings in Ireland ranged from +11.7% to –12.6%2. For a fund of €20m at the start of the year, this would have made a difference of €4.86m.
Even in less volatile times, performance has a profound impact on costs and benefits. Over 30 years, an average return of 4% per annum on a fund of €20m would grow to £64.8m, while a 5% per annum return would see it grow to €86.4 million; a difference of over €20 million.
Issues with administration and communication may be harder to measure in terms of financial loss, but they may give rise to a lack of confidence in the pension arrangements.
Given these elements, it is important that any decision made to move to a master trust arrangement, or other bundled solution, is considered carefully before implementation. This includes the implications of the decision.
Addressing Due Diligence and Conflicts of Interest
As with many arrangements, one may encounter potential conflicts of interest in a master trust arrangement. The Pensions Authority stated that a master trust “may create conflicts of interest that do not arise with single employer schemes”3 and that “Master trusts are in effect third party financial institutions which may be run for profit or have close connections with for profit entities”3.
The concern expressed above by The Pensions Authority is highlighted by the not untypical overlap of the key providers in a master trust. This is reflected in Figure 2 below, where we consider the ‘Better Master Trust’ of Better Group Limited.
Figure 2 – Better Master Trust Key Roles
It is often the case that the key service providers to a master trust are themselves part of the same group as the master trust company. Where the trustees are unrelated to the master trust group, it should be understood that the appointment of the trustee(s) is made by the owner / founder of the master trust.
In considering master trusts, or any bundled solution, trustees and employers should ask their advisors to highlight any potential or actual conflicts of interest.
Requirements of Trustees / Sponsoring Companies
We recommend that trustees and sponsors of existing company pension arrangements determine the most appropriate plan structure by looking at the existing plan structure and alternative approaches. This may include bundled solutions (including master trusts), depending upon objectives and priorities. The following is a summary of the recommended steps:
- Identify and prioritise the key elements of pension provision
- Determine the most appropriate structure for the pension arrangements
- Determine the most important factors in the potential provider(s)
- Compare and contrast the providers, leading to appropriate selection
- Project manage the required changes
- Conduct regular and independent reviews of the new structure and provider(s)
All of the above may need to be considered in the context of legislative changes, particularly IORP II and new legislation on master trusts.
We recommend that undertakings of this magnitude need to be approached with the same level of diligence and care as if a sale or purchase of a company was being transacted.
For many, a master trust may offer the most appropriate solution and they are a welcome addition to the market place, but it cannot be assumed that is the case for all. Other bundled solutions may likewise be appropriate, the key is to gain properly independent advice to ensure that the advantages and disadvantages of each arrangement can be carefully considered.
- Rubicon Active Managed Fund Returns
- Based on returns of 4% per annum and 5% per annum over a 30 year period, an initial fund of €20m would grow to €64.9m and €86.4m respectively
- The Pensions Authority: Regulation of defined contribution master trusts – Consultation document issued by the Pensions Authority