What small trust-based schemes should consider when moving into a master trust

TPR’s new assessment guidelines will make governance more complicated for smaller trust-based schemes. So, is it time to move to a larger master trust and, if so, which one?

The Pensions Regulator’s drive to ensure trust-based schemes provide value for money emphasises member assessments and whether small single-employer trusts with less than £100m can achieve positive member outcomes on costs, charges, investment returns and administration. Part of the reasoning is larger schemes have lower running costs per member and better buying power. 

Where to start?

It’s a daunting task ensuring the correct governance is in place to meet the new requirements and complete the assessment. The Pensions Regulator’s website explains the new guidance, but this may raise further questions, like:

• What’s the cost?

• Which 3 DC schemes do I compare with?

• And, what happens if after all this work, my scheme fails the requirements?

These are challenging questions, and there’s the belief that many Trustees of small schemes will elect to move to a master trust arrangement. So, if you’re faced with this scenario, what’s important to consider?

Cashflows are key

An important factor should be the master trust’s size and scale. We often use AuM to determine this but possibly more important – and often overlooked – is the size of monthly cashflows. High continuous cashflow is key. It helps provide the scheme with stability and longevity and gives the option to use profits for future propositional developments that will benefit its members.

Investment capability should also be viewed with scale in mind. For instance, an important aspect to consider is the evolution of providers’ ESG investment strategies. It’s my belief that we all need to have an appreciation of what a provider’s investment team actually means by ESG and, critically, how their strategies are being implemented. This is important for all funds offered, but especially for the default arrangement where most savers invest.

This is important for all funds offered, but especially the default arrangement where most savers invest. Scale, in terms of large cashflows with a clear investment roadmap can enable a more sophisticated ESG implementation strategy, possibly through cashflow redirection, rather than a simple sale and buy approach. This can reduce both risk and transaction costs incurred by the member.

Long-term goals

It’s also important to understand what the provider’s endgame is:

• To sell when the scheme is large enough and is attractive to competitors?

• To repay its shareholders?

• A scheme that is losing money and subsidised by other business lines, and if so, how long will it be allowed to continue? 

Answering these questions will help clarify whether you can trust the selected scheme to provide long-term retirement solutions for members. If there is uncertainty in any of these areas, it may mean future change, leading to member confusion and possible poorer outcomes. And ultimately, the final question must be… is that something any of us should willingly accept?