DC Excellence - Master Trust Arrangements

Joanne Tibbott: Good morning everyone and welcome to our DC Excellence Webinar. Today we are going to be focusing on what a lot of us are seeing at the moment with DC to DC Transfers. I think certainly in our team, we have seen a huge increase in these over recent years and we think this is a trend that is only set to continue with more and more of our clients looking at consolidation and certainly that is the direction of travel from the government as well.

So the purpose of today's Webinar is really to share our experience of working on those projects with you. Looking at a lot of legal issues that come up, but also sharing some real practical insight into what the market looks like, the Master Trust markets and also things to look out for when you are embarking on a new kind of project.

We are going to be guided through the presentation today by our two speakers. Our first speaker is Hannah Beecham, who is a Principal Associate in the team here at Gowling. Hannah and I work on a lot of these DC to DC transfer projects together, both from the perspective of employers, but also trustees, transfers from occupational schemes. Also looking at employers looking to move from GPPs, actually as well, to the Master Trust market.

Hannah is joined by Shabna Islam today, who is Head of DC Provider Relations at Hymans. Shabna is the expert in all things Master Trust related and is really used to seeing these projects implemented from start to finish. Advising both employers and trustees on all aspects and so has some real practical experience, which she is going to share with you today.

Before we move on to the presentation, just a couple of housekeeping items I just wanted to mention please. If you have any questions, there is a Q&A box at the bottom of your screen. If you have any questions please share these and we will do our best to answer those at the end of the presentation. Once you log off at the end of the Webinar, there is a feedback form and as always, we would be grateful for any feedback that you might have on the presentation. So without further ado I am going to hand over to Hannah. Thanks Hannah.

Hannah Beecham: Thanks Jo. Okay, so I thought I would just start, before we dive into the presentation, with a brief bit of background. Just to recap for a lot of people on the call will talk about what is a Master Trust and how they are regulated. And I think that it is fair to say that Master Trusts are not a new thing, as a legal model they have been around for a long time now. Most commonly seen, I think, in industry wide schemes were you might have a lot of unconnected employers participating in a single pension scheme.

DC Master Trusts though have proliferated over the last ten years or so and I think the main catalyst for that has been the introduction of automatic enrolments as a requirement for employers, meaning that more and more employers have needed to establish workplace DC pension schemes. Shabna is going to touch in a minute on some of the other reasons why employers and trustees might be looking to move to Master Trusts. From a legal perspective this proliferation of the number of DC Master Trusts over the last ten years or so led to concerns about how Master Trusts are regulated and how we, as a pensions industry, ensure that Master Trusts remain a safe and high quality place for people to have their pension savings.

So this led, in 2017, to the Pension Schemes Act 2017 which is legislation introducing a regulatory framework for Master Trusts. That legislation introduced a statutory definition of a Master Trust and any scheme that meets that definition has had to apply for authorisation from the Pensions Regulator to operate as an authorised Master Trust. And now it is actually… it is illegal… it is subject to a criminal civil penalty if you operate a Master Trust that has not been authorised by the Pensions Regulator.

In order to get authorised, Master Trusts have to demonstrate a number of things to the Pensions Regulator. The process is quite stringent. I know we have been through it with a couple of our clients that are Master Trusts and there is a lot of information that has to be provided. So there are assurances around the quality of the Master Trusts, the people that are running it, and whether they are fit and proper persons to be running a Master Trust. There is also quite a lot around the administration that sits behind the Master Trust and also continuity planning for if the Master Trust were to close down at any point in the future.

So with all of that in place on the market for Master Trusts Shabna again will talk about this in a minute, has changed and continues to develop. But I think the authorisation of Master Trusts has also meant that a lot of employers and trustees are now looking at Master Trusts as a good option for their future pension provision.

So I will pass over now to Shabna who is going to talk a little about what the DC market looks like at present.

Shabna Islam: Thanks Hannah. So on this slide I have got the current DC market place and what that is looking like. We have 36 authorised Master Trusts with a total of £110 billion of assets under management and that has overtaken the single employer trust arrangements in the last year, which is running at around £71 billion so Master Trusts have gained quite significantly from that move away from single employer trust and that shift or trend is continuing to grow.

We haven't seen a peak of activity yet, we expect it to continue for a number of years especially with the push from the regulators in particular targeting some of those smaller schemes so schemes smaller than £100 million. Neither area is contract-based arrangements or GPPs, they are remaining relatively flat, we are seeing some movements of sorts of those moving towards Master Trust.

Then looking into the future, so where do we expect the market to be in say ten years' time? I expect the number of Master Trusts reduced and that's via consolidation of providers to around 15 to 20 providers. We expect the growth in assets under management to continue with some further shift from single employer trust arrangements. Also through investment growth and regular contributions and with single employer trust arrangements you would expect that to reduce and the schemes that remain as single employer trusts are those for some of the largest employers is what we expect.

For contract based arrangements, again just remaining relatively flat but again continue to see some movement towards Master Trusts but some of those movements offset by new arrangements where Master Trusts may not fit that employer. So those are the trends that we are seeing in the market. But what is driving that move to a Master Trust?

So on this next slide I've got some of the common reasons for employers and trustees, so there are lower costs and charges, the running cost for an employer are typically lower in a Master Trust, typically also lower charges for members, the market is very competitive and pricing continues to be pushed downwards. We are also seeing improved member experience for Master Trusts and they invest really heavily into their proposition, their admin functions, their communications, their digital tools such as mobile apps and they offer a very smooth and well considered member journey over the whole same phase through and into retirement.

There is enhanced governance that is through a dedicated and independent Master Trust board with scheme strategists and huge teams to support them. Now, in some cases the move is part of a wider strategy. For example, it could be that if you have got a DB section of a hybrid scheme, that part of its end game planning is looking to buy out its DB benefits with an insurer and part of that plan is to wind up the trust. Therefore, there is a need to transition the DC section members and typically, that is to a Master Trust.

Now Master Trust do offer, I believe, a future proofed arrangement, it is a product where the providers continually invest heavily to offer solutions that members need and want, not just now but into the long term future. Some of the things in the last couple of years that have stood out for me in terms of Master Trust being really future proofed is that significant ESG integration into their default investment funds. The use of digital to enhance members' experience as well as integrating wider financial wellbeing solutions as part of the member journey. Overall, this is leading to better outcomes for members and not just from a trustee perspective but also employer perspective. Hannah is going to take you through some of the key responsibilities for employers and trustees.

Hannah: Great, thanks Shabna. So in this next bit we wanted to talk you through the key stages of Master Trust transaction. Before we get into the detail of that I just wanted to take a step back and look at it from a legal perspective because I think one of the key points from a legal perspective in relation to a Master Trust transaction is that actually there are two separate transactions happening. So I have set this out on the slide here as a two stage process.

The first stage, is the employer's change of its provider for its future service pension benefits for its current employees. That is a change in relation to future service benefits and so legally speaking, that is primarily an employer decision and the role of the trustees. Anyone who has been through any kind of scheme closure will have heard this previously. The role of the trustees in a pension scheme is primarily to look after accrued rights so what has already been built up. The role of the trustees in relation to deciding what benefits current employees should get in the future is somewhat limited and so this first stage of a Master Trust transaction you might think it is not particularly a trustee issue or concern.

Having said that, the second stage of a Master Trust transaction. which is the transfer of the pots of savings that members have already built up in the existing pension scheme over to the provider is very much a trustee issue and concern. There are a few reasons for this. Pensions legislation sets out a lot of requirements around trustees and transfers for accrued pots. if that is happening without member consent, which is typically what happens on a Master Trust transfer so there are responsibilities for the trustees to investigate and do due diligence on the receiving scheme to make sure that it is, for example, an authorised Master Trust that can accept those transfers without member consent.

The trust deed and rules for most occupational pension schemes will also typically give the power to transfer accrued benefit to the trustees or to the trustees and employer jointly. So employers looking to move their existing pension scheme, the accrued benefits to a Master Trust provider are likely to need trustee co-operation and consent to that stage of the process. What we find in practice is that while legally you might say this is a two stage process, where stage one is all about future service benefits and so is an employer issue. Stage two is more of a trustee concern.

In practice, most employers would not want to embark on that first stage of the process until they are sure that the trustees are also onboard with the future plan to transfer the accrued pots. It can be very awkward to say the least if you get a situation where an employer has decided and communicated with its staff about moving their future pension savings but then finds that the trustee is uncomfortable transferring the pots that members have already built up into that new provider scheme.

I think we will talk a little bit more in a minute about how you mange that in practice, around making sure that the trustees and employers are well engaged and provide a selection in the process. Just before you move onto that I also just wanted to touch briefly on the role of the trustee and the trustee considerations in deciding whether it is appropriate to use their bulk transfer power to transfer benefits into a Master Trust. One of the points which comes up frequently in practice is for the trustee to understand whether in order to go ahead with a Master Trust transfer, they need to be absolutely comfortable with every aspect of a Master Trust and its provision. And whether they need to be satisfied that everything in the Master Trust is as good as or better than their existing scheme. My view is that is not the case, that actually in practice trustees can look at a decision whether to move to a Master Trust in the whole, they can weigh up a number of different considerations including the impact on the members looking at the transaction more holistically in deciding whether or not to go ahead. So I will pass back to Shabna now to talk about the key phrases of a typical project from her perspective.

Shabna: Thanks Hannah. So here is the typical framework for the places for the Master Trust transaction project and the key point here to emphasise Hannah's point that whilst the asset transition is the end of the project, it is reliant on the trustees to approve a bulk transfer. Therefore, it is really important that the trustees are involved in the project from the start.

So step one at the objectives setting stage is really working alongside the employer to determine what features the trustees are looking for when picking a Master Trust provider. What I have got on the next slide is those features on a high level, so I have got them categorised into eight areas. For example, as a trustee you might want an investment default that is comparable to your current scheme. You might want a Master Trust that offers really strong governance policies, you might want a Master Trust that offers really competitive charges and better overall value for members. Now identifying these ones early on in the project as well as having the agreement in principle for the bulk transfer, it does really make for a smoother asset transition later in the project but there are lots and lots of features that sit behind all of these, the trustees would want to get involved in.

Now moving on to the next slide which is the wider considerations and the risks for a Master Trust project. So on here we have got some of the common areas and Hannah will take you through some of the legal points first and then I will pick out some further points to talk through as well.

Hannah: OK, thanks. So in the time that we have got today, we are not going to be able to go through all of the points on that slide Shabna has just shown you. Nor are we going to have time to go through all the legal points. But we can definitely use the time today to talk about some of the issues which come up on pretty much every transaction, which we found can be particularly time consuming and knotty. We have actually got quite a lot of good knowhow to share with you, hopefully to share some experience and save you a little bit of time for when you are starting to think about Master Trust transactions for your own schemes.

The first issue I just wanted to touch on is an employer side issue and it surrounds current staff. One of the first things that an employer is going to need to establish before it decides whether it is feasible to go ahead with a Master Trust transaction is whether they have any particular contractual issues with their existing staff and existing contracts which would prevent them or delay them in going ahead with the change of pension scheme provider.

Employment contracts. Anyone who is in HR will know they come in all shapes and sizes and they are not restricted to what is written down on a piece of paper which says employment contract at the to. They can also incorporate amendments that have been made over time, implied terms and terms implied by customer practice so actually working out what an employee's contractual benefits are can be quite tricky.

In relation to a Master Trust transaction, we would always recommend that employers carry out a proportionate amount of due diligence into employment contracts. As you know, you would not necessarily be able to get to the bottom of every single employee's contractual promises over the whole history of their employment. But as an employee, you would certainly be wanting to do a spot check of written employment contracts to work out whether there are any wording in those that would lead you to believe that you need to, for example, get employee consent to change provider.

Red flags that you might be looking out for are, for example, you have got written contracts which say very clearly you are entitled to join a named occupational pension scheme and they will deduct benefits in that whilst you work for us because that would arguably give rise to a contractual right to stay in that scheme. That might mean that you need to think about additional steps to go through before you can make that change without it being a breach of employment contracts.

Linked to the employment contracts piece, employers also need to think about their duties under pensions legislation to consent with current employees about a change of pension scheme. So for anyone who has been through a DB defined benefit closure exercise pension consultation might put the fear into you because those pension consultation exercises, in my experience, can be quite drawn out, they can be quite emotive in some cases and take quite a long time for employers to work through and manage.

Fortunately, you will be pleased to hear, that in relation to changes of DC provider, in my experience, consultation is more or less onerous for employers. The underlying legal duties are the same but in practice, we are finding that the amount of employee engagement and feeling in relation to provider selection is probably less than it would be when you are talking about a change from DB to DC. Consultations generally run pretty smoothly but that does not mean that the employer would not want to take some time at the beginning to make sure that they set the process up in the best way. So it can have meaningful consultation with its employees and consultation can also be a good way to improve employee engagement with the idea of Master Trust and pension saving more generally.

So that is what I wanted to say on current staff. In relation to existing DC pots and this is coming back to the Phase Two of the two stage process that I have talked about a few slides ago. There are a number of legal points that can come up around the transfer of accrued pots into a Master Trust. Both from a trustee and an employer perspective, these generally come up in due diligence and the majority of the issues that we see in practice relate to provisions in either the existing scheme's rules or in administration practice which give rise to complications and how you transfer to a Master Trust. So one of the jobs that we would always do at the outset of these projects would be recommend whether we are advising trustees or employers to get done is to work through a checklist of known issues in relation to pension schemes. So you will understand at a very early stage whether there are any issues that might slow down the Master Trust transaction or mean that you need to take steps before you get as far as transferring the existing pots.

The kinds of issues that I have seen in practice for example, would include DC schemes which have ordinary claim for DC benefits for current staff but they might provide a DB type benefit on death in service. So for example, if you have a set of scheme rules that say the DC member dies whilst they are in employment, their spouse will get a pension which is a multiple of the employee's salary. That's a DB benefit and so it is unlikely that Master Trusts will replicate that. Master Trusts either do not provide death benefits at all, in which case you need to look at a separate trust for death in service benefits.

Or, if they do provide benefits, it is most often a multiple of salaries lump sum rather than as an ongoing pension, so that is one issue which can come up. Other issues which come up and I think, Shabna is going to touch on this as well, are around tax protections. So that is again something that you would want to flush out at an early stage and understand whether it is an issue. Then the other one which can come up in particular if you have older occupational DC schemes is if they have any kind of DB underpin or contracting out underpin in relation to the benefits which again can be difficult to replicate in a Master Trust.

So, as I said, the best way to work though those is to do some due diligence early on. Understand what benefits you have and the transferring scheme and think about whether those are benefits that need to be either removed, replaced with an alternative or whether that leaves you with populations of staff for whom a Master Trust transfer would not be appropriate.

So assimilation to existing DC pots, the final legal issue I just wanted to touch on is data protection. This is something which again comes up typically on every transaction that I have advised on in order to implement a bulk transfer from one pension scheme to another. Those two pension schemes transferring and receiving typically need to share data about the members of the pension scheme and that will usually be personal data and in some cases it will be sensitive personal data because it might include information about people's health or their nominations for death benefits.

So that means that you need to think about data protection law and whether it is legal and possible to share that data without the data subject's consent or some of their protections in place. Now, when you come to look at bulk transfer agreements between a transferring and receiving scheme. They do typically deal with data protections and they will set out in the clause somewhere whether the parties are acting typically, the parties will be acting as a data controller to data controller and both agreeing that they will comply with their legal requirements because of that. And that is great, that is really helpful when you get to the point of actually transferring the assets over, what can be slightly trickier in practice is that often the transferring scheme and the receiving scheme will want to share member data before they get to the point of having signed the bulk transfer agreement.

One of the reasons for that is that the receiving scheme might need to set up member accounts for the transferring members. The other reason is that the receiving scheme and transferring scheme may need to do a cross check of their membership in order to work out if they have got any individuals who are already members of the receiving scheme. Because if that is the case, that can in some cases, causes issues for tax protections. So all of this means potentially transferring trustees are being asked to share member data before they have got a bulk transfer agreement in place. So one of the issues to work through from a legal perspective is whether that is ok under data protection law. Whether the trustees would want to ask for a standalone data sharing agreement. Or more likely, whether they would want to take some interim steps to kind of satisfy themselves the data security measures are in place and that they have done a proper data protection audit so that they are comfortable sharing the data without a standalone data sharing agreement.

OK, so those are some of the key legal points, I will now pass back to Shabna to pick up on one or two others on that slide we saw previously.

Shabna: Thanks Hannah. I will pick out on the slide, there are some bold ones there, so firstly protected cash and retirement age. Now this is where some members are entitled to tax free cash higher than the usual 25%25 of their pension pot. Or, protected age where they are entitled to a minimum pension age that is earlier than the standard minimum pension age. And what we have found is the tricky part is identifying these members so there is some data cleanse work that is needed alongside your administrator to work them out. In most cases once you have identified which members are affected, these protections can be carried forward to the new Master Trust. That is as long as the bulk transfer rules are met. Now in some cases the transfer rules are not met and that is usually in the case of a partial transfer, if a member has benefits elsewhere within the trust so that is worth working through that at an earlier stage.

It is also worth mentioning hybrid schemes here. So where you may have some members with both a DC and a DB benefit in the same trust, and your scheme allows your members to use their DC pot to fund their DB tax free cash rights. That is usually not an option going forward once a DC pot has been transferred to another trust or a Master Trust. But you can set up what we call a switch-back facility. This is where you transfer back the DC benefits at the point of retirement to the original DB trust scheme and still they will have this option to take the tax free cash in this way and it is quite a common facility now for Master Trust providers to offer this.

Moving on to ongoing governance of the new Master Trust arrangement. Now that is something to consider early on in the project so whilst there is no requirement to set up a governance committee to oversee the new Master Trust, it is really part of good governance to really keep a close eye on your provider especially as the market is changing quite rapidly. Now in practice what we are seeing is the level of oversight does range between employers. It ranges from limited oversight maybe a once a year check in, it does mean a bit more in-depth but oversight may be quarterly meetings with your provider. Now what works really well with a Master Trust transition project ito establish that governance policy early on and communicate it with your trustees and their members because it is a real positive measure as part of the overall transition to a Master Trust that you are not just simply transferring the members and forgetting them or abandoning your members.

Now finally, transition costs and out of market risk which I will cover together. So this is the cost of disinvesting and reinvesting from the current investment plans to the new investment plans with a Master Trust and also there is a risk that the funds are out of the market for a short period of time. Now this cost and risk would in normal circumstances, be met from the members' pension pot but providers, Master Trust providers have recognised that this is quite a big hurdle to overcome for some of the trustees when it comes to approving that bulk transfer that members might be out of pocket here. So commercially, the providers have taken that decision to meet the transition costs and mitigate those out of market risks on behalf of the members and that is part of the negotiation of terms when selecting a provider. So those are a few of the wider considerations and risks that we have picked out that are quite common but there is a lot more on here that this should cover, a lot wider things to think about but what I will do now is just hand back to Jo to close off.

Joanne: Great, thanks both. So I think that was hopefully a really useful summary of kind of the key points we need to take into account when you are embarking on this kind of transaction. As both Hannah and Shabna have said, there is a huge amount to cover and I think really as they have emphasised, the key part is really in the planning at the start of the process to ensure that these transactions run smoothly.

It just leaves me to say thank you very much for attending today, we hope you find it interesting and useful.