Master Trusts Are Anti-Competitive and Need Urgent Reform

Thu Jan 21 2021

A master trust is a pension scheme that caters for multiple employers. The structure enables employers and employees benefit from economies of scale and removes the burden of trusteeship from the employer.

Functions such as trusteeship, administration, investment, and communications are provided for through a central company for the different employers within the master trust.  Each employer keeps control over certain aspects of their own plan, such as the level of contributions.

Master trusts have recently been identified by regulators as the best option for the future.  It has been suggested they should replace smaller schemes, including possibly individual executive pension plans.

However, there are many flaws within the structure of master trusts.  A recent review by the Pension Authority into existing trusts highlights these issues and frankly makes for grim reading.

It found issues with every master trust, some of which were significant:

  • In many cases trustees were under the control of the Master Trust founder, usually a financial institution or a consultancy firm, where the individual trustees were often employees of the founder;
  • In some schemes, the rules do not allow the trustees to replace the administrator (usually the founder), irrespective of how bad a service is being provided;
  • In many cases trustees do not seem to understand the breadth of their responsibilities;
  • In one case the investment of members’ money was placed wholly under the control of the founder, with little or no input from the trustees;
  • Significant conflicts of interest were found between the parties involved in operating the master trust, for instance, the same entity or group effectively providing all services such as trusteeship, investment management and administration.

The Pensions Authority report did not address a number of other issues involving Master Trusts.

Employees and directors in standalone schemes, as opposed to Master Trusts, have wider investment choice and contribution flexibility than that available within a master trust scheme. The latter do not, for example, allow for a self-administered investment portfolio or a property fund.

There is also great risk that a small number of master trust schemes could monopolise the market, to the detriment of consumers, if employers can only choose between a limited number of similar master trusts.  Employers should not be forced to use a master trust, rather it should be an option.  Options should also be provided to employers who want to opt out of a master trust scheme and go back to their own stand-alone scheme, should they wish.

There is no doubt but that Master trusts are by their nature anti-competitive. They lock in employees and employers alike.  A bit like Hotel California, you can check in any time you like but you can never leave.

While the Pensions Authority concluded its report by saying it expects all trustee boards, and their advisers, to fully consider the authority’s findings and evaluate their own practices to establish if improvements are required, this is hardly enough to ensure change to protect consumers and employers, given the magnitude of shortcomings identified.

Link to Brokers Ireland recently published article in the Sunday Times (17th Jan. 2021) titled: ‘Workplace pension scheme cull could lead to ‘conflict of interest’.

Rachel McGovern, Director of Financial Services, Brokers Ireland 


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