What is a trust-based pension?

It’s a workplace pension scheme managed by a board of trustees instead of an employer. The trustees are legally responsible for running the scheme in the best interest of its members. 

As an employer, you’ll need to set up the scheme under a legal trust. There are two types of trust-based pension – defined benefit (DB) and defined contribution (DC). A DB scheme promises a set retirement income based on an employee’s salary and length of employment. With a DC pension, both the employer and employee make contributions, which are then invested. So, the potential retirement income depends on how much is paid in, how well the investments perform and any fees or charges that are deducted.

The board of trustees are responsible for: 

• managing the scheme assets 
• making sure the scheme stays compliant with pension laws and the scheme rules
• overseeing any investment decisions 
• keeping in touch with scheme members. 

You can find out more about the role of trustees on The Pensions Regulator’s website. 

You’ll need to do four things: 

• set up the trust
• appoint trustees, this could be a professional trustee company, and
• make contributions to the scheme. 
• comply with your automatic-enrolment responsibilities

Having a good relationship with the trustees and making sure both sides are communicating with each other is key to successfully running a trust-based scheme. To make sure you stay compliant, you’ll need to tell the trustees about any business changes that could affect the pension scheme. These could be things like potential mergers, redundancies or restructures.

All trust-based schemes are regulated by The Pensions Regulator (TPR). Trustees must have a certain level of knowledge and understanding of the laws relating to pensions and trusts. They should also know about the funding and investment of pension schemes. You can learn more about these requirements on TPR’s code of practice modules.

Trustees must also make sure there’s proper administration and reporting set up for the scheme. They’ll also need to keep these key documents up to date: 

• trust deed and rules 
• contribution schedule
• statement of investment principles (SIP)
• statement of funding principles – these are only needed for defined benefit schemes. 

As with anything, there are pros and cons to starting a trust-based scheme. 

Ultimately, it’s about working out what’s best for your business and your employees. Do you have the resources and expertise available to support a trust-based pension scheme? If you’re considering setting up or moving to a trust-based pension, we’d recommend speaking to a financial adviser to help work out your options.