Guidance on the decision to transfer to a master Trust

The UK Regulator considers “a “smaller” defined contribution scheme to be one with fewer than 5,000 members, so this guidance is appropriate for the Irish DC sector in general. 

The guidance makes clear that trustees should consider:

• if their existing scheme offers value and will continue to do so in the future; and 
• whether the trustees can meet the regulatory expectations applicable to a defined contribution scheme.

If trustees know that their members may get better outcomes in another scheme such as a master trust, the UK regulatory position is that the trustees should consider transferring their members. This is part of a broader push from the UK government and UK regulators to reduce the number of defined contribution schemes in the UK, in part, by encouraging smaller defined contribution schemes to consolidate into master trusts. 

This raises interesting questions for Irish trustees, who normally would not make a pro-active decision to wind-up their scheme and to transition their members to a master trust rather than waiting for an employer decision to do so. 

The UK guidance sets out four key factors to be considered. These are:

• Changes to the regulatory landscape;
• Costs;
• Regulatory priorities for trusteeship; and
• The needs and priorities of the scheme’s members. 

Changes to the Regulatory landscape

The guidance notes the increased regulatory burden on trustees and states that trustees should consider whether their scheme offers value and will continue to do so in the future. If the trustees know that their members may get better outcomes in another scheme such as a master trust, the guidance indicates that trustees should consider transferring their members. 

The consideration of value by trustees will become increasingly significant in the UK, with a new value for money framework due to be introduced from 2028. 

Costs

The guidance indicates that costs should be a significant factor in trustees’ decision as to whether to transfer to a master trust. This includes not just current costs, but likely future costs of continuing to operate the scheme. In considering the best interests of members, trustees should weigh up the cost of continuing to run the scheme with the cost of transferring to a master trust, and any potential changes in the costs to be borne by members. Consideration should also be given to what members are receiving in return for the costs being charged and whether that meets their needs.

Cost considerations for transferring a scheme include:

• transition costs, being the one-off cost of dis-investing members and moving them to a new investment structure and potential investment strategy, and who will bear those costs;
• the difference in member charges under the existing scheme and under the proposed master trust;
• possible advisor costs and who will be responsible for those; and
• winding-up costs and who will be responsible for those.

All of this will be commonly considered in an Irish context also, but it is interesting that the UK regulator requires trustees to project forward and consider the potential future running costs of their scheme as well as its current costs. 

Regulatory priorities for trusteeship

The UK Regulator has indicated that they want all schemes to be:

• well run and governed;
• to have high standards of administration and good data quality;
• to be operationally resilient, including against cyber risks. 

The guidance indicates that trustees need to consider whether they can meet these regulatory priorities for the benefit of their members. If the trustees foresee difficulties with this, then they ought to consider if their members would benefit from being in a scheme which can better satisfy these regulatory priorities.

The needs and priorities of the members

The guidance indicates that trustees need to consider and understand the requirements and priorities of their members and ensure that their scheme is delivering on those. Trustees need to consider whether they are providing a default fund which meets the members’ needs and whether they are supporting their members throughout their pension journey.

UK master trusts are authorised and supervised by the UK Pensions Regulator. This is a development which, as we know, will be coming into Ireland under the new proposed authorisation legislation. The guidance highlights that the extensive supervision of master trusts by the UK Pension Regulator offers a degree of comfort to trustees of defined contribution schemes that their members are being moved to a scheme which meets certain standards and is supervised by the Pension Regulator to ensure that it continues to do so.

The guidance lists a number of benefits which master trusts may be able to provide to members who have transferred from a smaller defined contribution scheme:

1. Master trusts are often sufficiently large to be able to access a broader set of investment opportunities, which may improve the investment strategies they can offer to their members. 
   
2. Master trusts have governance structures that can allow for on-going innovation and adaptation of investment strategies as market conditions change. They may have more opportunity to provide sustainable long-term growth than smaller schemes. 
   
3. Moving members and their benefits to a master trust means the new scheme should be compliant with new legal and regulatory requirements, including the requirement to offer post-retirement solutions, in line with the introduction in the UK of the concept of “guided retirement”. The UK is already operating in-scheme drawdown, and the ability  to offer in-scheme drawdown solutions may become a key benefit of Irish master trusts in the future.
   
4. Master trusts can deliver innovative solutions to communication and encouraging member engagement to ensure members are supported in their pensions journey. 
   
5. Master trusts are also developing innovative solutions to transferring members over with guarantees of additional benefits such as with profit arrangements. This is less relevant to the Irish market. 

Approaching and selecting a master trust