We explain some basic differences between contract and trust pensions, so you can see which could be right for you and your employees.

Trust based pension schemes have seen tremendous growth over the past few years driven by the growth in master trusts. Employers have clear choice when it comes to providing a workplace pension for their employees. 

So, what’s the difference between a contract-based pension and a trust-based pension?

  Contract-based pension * Trust-based pension

Subject to Financial Conduct Authority (FCA) rules.

An Independent Governance Committee (IGC) oversees how providers operate their workplace personal pensions.

The IGC can recommend changes to the provider’s board and can report a provider to the FCA if they think insufficient progress is being made.

Subject to the Pensions Regulator (tPR) rules and Occupational Pension Scheme legislation.

A board of trustees is jointly and severally liable for everything that happens with the scheme.

Governance is independently audited if the scheme is a master trust and is included in tPR's list of authorised master trusts and their Master Trust Quality Assurance list.

Investment choice

The provider’s investment governance team decide on the fund range available to members.

This could be a default, wider governed range and further self select range.

A group SIPP might offer an even wider investment choice including the ability to invest in individual company shares.

The Trustees, with the help of professional investment advisers, decide on the fund range available to members. 

Trust-based schemes must have a default investment option/fund if they are used by employers as an auto-enrolment scheme. Employers, trustees and investment advisers all have a role in selecting and monitoring a scheme's default investment option.

The Trustees must carry out ongoing governance on every fund they offer, so fund ranges tend to be smaller than in a contract-based pension.


Charges are limited by the charge cap.

The IGC must also report on the value for money provided to members by all of a provider’s workplace personal pension products. 

The provider will complete a value for money assessment as well.

Charges are limited by the charge cap.

The Trustees must report on the value for money provided to the scheme’s members when compared with alternative options available in the market. 

The provider will complete a value for money assessment as well.

Tax relief

Operate on a Relief at Source (RAS) basis.

This means that the government add basic rate tax relief to every employee contribution.

Those who pay more than 20% income tax need to claim the extra they are due from HMRC.

Will often operate on a Net Pay Arrangement (NPA) basis.

Tax payers get full tax relief on their contributions through payroll. There’s no need to make a claim from HMRC but non-tax payers don’t get anything from the government.


Member communications must meet FCA requirements and be clear, fair and not misleading.

Member communications must meet tPR and Department of Work and Pensions (DWP) disclosure requirements and be accurate, clear, relevant and in plain English.

Security and sustainabiity

Contract-based pensions are included in Solvency II calculations that must be provided to the Prudential Regulatory Authority (PRA).

This is a measure of the capital insurers need to hold to reduce the risk of insolvency

Trust based schemes aren’t subject to Solvency II requirements.

Members benefits aren’t protected by the FSCS unless the Trustees invest in an investment product provided by an insurer.

Master trusts will have to submit evidence that they have a sustainable business plan, and sufficient reserves to ensure that member benefits are protected if the scheme should fail.

* includes group personal pension, group stakeholder and group self invested personal pension

So, which is right for you?

Employers looking to support their own trust based scheme should be aware that this will require a more significant investment to support their board of trustees than a contract-based pension or master trust option. Employer responsibilities when operating a contract-based pension or master trust are broadly the same, so the choice is down to how each scheme fits with your workforce.             

For example, if you have workforce that’s likely to invest in a wide range of funds, a contract-based pension might be right for you. But if you think a more focused fund range will make choices easier for employees, then a Trust based scheme may be a better choice. 

Similar considerations will apply across all the main criteria we’ve listed.        

While we’ve tried to cover the main differences that apply you should always seek advice from an experienced adviser before making any decision about your company pension scheme.     

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