What’s driving the move to master trust?

When you're deciding on a pension scheme, this may be for automatic enrolment, there are lots of important factors to consider. Staying compliant to pension regulations, managing costs, ensuring the right systems are in place and making sure your members benefits are protected can feel like an impossible juggling act for many employers. Master trusts aim to remove some of the burden and responsibilities of managing a pension scheme, and we’re seeing an increase in transfers to master trusts as a result. But what’s driving the move to master trusts?

In the UK we’ve seen how auto-enrolment has increased the need for businesses to provide their employees with the right pension. There’s an expectation of employers and trustees to ensure they stay compliant whilst also delivering scalable, effective schemes. Many need more in-depth professional advice as a result. A master trust offers a ready-made regulated framework, meaning employers can confidently meet the needs of their members. 

Cost and efficiency 

Master trusts are also beneficial when it comes to cost and efficiency. Employers can benefit from lower administration and investment rates, making it easier to balance the cost of their pension scheme. With shared governance and scheme administration, master trusts help individual employers manage their pension scheme.  

Governance and member protection 

The role of the trustee board, made up of individual trustees, is crucial in a master trust. They regularly engage with both employers and scheme members, making sure they are always acting in their best interests. The board has a responsibility to meet the strict authorisation and supervision standards set by The Pensions Regulator (TPR) ^{Footnote [1]}, so that their members are protected. 

Market consolidation 

We’re also seeing a lot of smaller or less efficient schemes being consolidated into master trusts, often to drive down costs or wind up an existing scheme. Either way, employers want future-proof solutions that can adapt and change with market changes – and master trusts provide exactly that. 

Robust governance from the Pension Schemes Act 2017 and Occupational Pension Schemes (Master Trusts) Regulations 2018 ^{Footnote [2]} keeps master trusts compliant with pensions legislation and TPR's requirements. This is something that can be a huge burden for employers to keep up to when it comes to managing their pension scheme.  

All master trusts must be authorised by TPR before they can operate. They must be able to demonstrate: 

• They’ve employed ‘fit and proper’ trustees and scheme funders, meaning people who have the knowledge required for the role 
• Financial sustainability is shown through the expected growth of the trust and how this will be funded 
• There are sufficient IT systems in place to manage the trust, as well as robust processes to effectively govern the scheme 
• There’s an effective continuity strategy in place in case of an event that may cause the trust to fail ^{Footnote [2]}. 

A master trust will go through regular reviews with TPR, and trustees have to report any significant events and maintain transparent governance of the scheme. This regulatory governance ensures the members’ best interests are met and upheld.  

An employer may decide to transfer for a number of reasons, from reducing costs, improving governance or to exit a legacy pension scheme. Aligning with auto-enrolment requirements or preparing for a scheme to wind up, which means it ceases to exist, are also reasons for a transfer. 

There are five steps involved in the transfer process:  

1. Due diligence  
   Assess the master trust’s investment strategy, charges and member services. 
2. Trustee and employer agreement 
   Both parties must come to an agreement on the transfer. 
3. Communicate with members 
   Inform scheme members of the change and any implications it will have on them.  
4. Transfer of data and assets 
   There must be an accurate and secure migration of funds and records.  
5. Wind up the old scheme (if applicable)
   Complete any regulatory filings and close the previous scheme down. 

Finally, it’s important to remember that all transfers must comply with TPR guidance and other legal requirements in order to protect the scheme members. Employers should consult both legal and pension advisers to ensure a smooth transition to a master trust. 

We’ve talked about the push-and-pull factors around master trusts, but is it right for your employees? The real reason to consider setting up your pension scheme as a master trust is the improvement they can make to your employees' retirement.  

The governance they provide is there to give you confidence when it comes to:  

• Fund performance  
• Member communications and engagement tools
• Flexible retirement options within the pension scheme 

The building blocks of a defined contribution pension scheme can make a huge difference to what retirement looks like for members. And it’s clear we’re seeing more employers and trustees hand some of these important decisions over to master trusts, relieving them of the responsibility of managing an independent scheme.