Andrew Short asks how employers will deal with the huge increase in staff up-take of their schemes that will follow the start of auto-enrolment.
Short-service refunds
One potential advantage of using a master trust that seems to have evaporated was the short-service refund; the employer could have potentially clawed back some of their contributions if the employee had left before two years.
Towers Watson senior consultant David Bird comments that the Department of Work and Pensions has said short-service refunds are unlikely to continue so he feels “some of the advantages of a master trusts have potentially disappeared.”
This point is echoed by Punter Southall principal Neil Latham, who feels that master trusts could have a smaller role to play in tackling the problems employers face with auto-enrolment.
He adds that because master trusts were very similar to group pension plans, one of the strongest attractions was this possibility of recycling of payments.
“The DWP is well aware of the issue and is seeking solutions that give auto-enrolled members long-term savings pots, which is the primary intention and purpose of the auto-enrolment legislation, not a refund of their contributions. Various statements from Steve Webb and others have been made to warn against employer exploitation in this area.”
Even if this is the case and short-service refunds are no longer relevant, Hollingworth states this was never a concern for Marks & Spencer and that the reason for picking a master trust was not to take advantage of this.
“Whether short-service refunds survive in their current guise, it is irrelevant and it shouldn’t be the basis for a decision alone – because it will change. There are many other potential advantages to a master-trust solution.”
Who’s going to use NEST?
NEST may be suitable for smaller employees but Pitmans Independent trustees independent trustee Richard Butler has found circumstantial evidence suggesting many large employers will opt-out of using NEST.
It does not have some of the bespoke options that a third-party provider of a master trust has.
“NEST is effectively a master trust,” says SEI’s Kapur, “whereby every individual has their own policy that has trustees over-seeing it.”
According to L&G’s Filbin the fact that NEST has a contribution cap has put off some of the larger employers, as will the contribution charge of 1.87%.
“Many find the NEST charging structure more expensive and it is not as powerful for employee engagement, as NEST is very directive.”
Filbin also adds many companies only want one point of entry for pensions. This sentiment is echoed by Latham:
“Many larger employees wish to avoid duplication of their pension arrangements or the creation of second-class members in a non-employer branded scheme. Many will not use NEST if their DC provider can accommodate these enrolees into a separate section of their main DC scheme.”
Whether other employers follow suit and use a master trust seems to be wholly dependent on the size of the employer and specific to their own existing pension scheme arrangements.
Auto-enrolment has meant that companies are now reviewing (or should be thinking of reviewing) their pension scheme arrangements.
This may lead them to considering a master trust or some other option. Whatever is done the countdown to 2012 is well and truly under way, and it would seem there are still many decisions to be made.
