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.
The implementation of auto-enrolment has thrown up many questions for employers.
Do they enrol employees into an existing scheme or create a new offering? Will NEST play a part in their pension’s arrangement? And the most fundamental question: what will the effect of enrolling potentially double or triple the number of employees into an existing pension scheme mean? Many of the largest employers (who are first to auto-enrol) have been fairly tight lipped about what they plan to do.
This silence was broken by Marks and Spencer at the start of August announcing it would be using a bundled defined contribution master trust for its pension arrangement post-auto-enrolment.
Is this a likely route for other schemes to follow, and what are the potential advantages of this approach?
Not a new concept
The DC master trust is not a new concept. However, with the announcement that Marks & Spencer is implementing one for auto-enrolment there may be renewed interest. The master trust combines aspects of a trust-based and contract-based DC scheme.
The big difference from a contract-based scheme is that it will have a professional trustee overseeing the scheme, monitoring investment funds and checking the administration is being carried out effectively.
Another characteristic of the master trust is that it provides the framework for individual company pension schemes to operate within and means companies can create their own bespoke funds.
SEI head of European institutional solutions Ashish Kapur believes this allows any master trust to provide a very strong governance framework around DC benefits.
“From an employer perspective it looks and feels like a contract-based scheme.
But there is the best of both worlds – the trust-based structure to provide good governance and a hands-off approach for employers, typically only available in the contract structure,” he adds.
So why have Marks and Spencer decided to go down this route? There are many companies that currently use trust-based schemes and these are usually on an unbundled basis (this means the administration is outsourced to a third party, as are the investment decisions).
For many organisations (such as Marks and Spencer) with large numbers of employees to be auto-enrolled, this will increase costs. “Larger companies will be auto-enrolling and paying contributions for many employees,” says Legal & General managing director workplace savings Tony Filbin.
“Those with unbundled arrangements, which work on a transactional cost basis, will have increased running costs in addition.”
A bundled master trust will roll all of these costs together and should, in effect, be much cheaper. Marks and Spencer’s reward manager for pensions Julie Parker-Welch believes this will be essential for the plan to be run efficiently.
This is because of the increased size of the scheme after auto-enrolment and the fact the retail sector is complicated for pensions because of turnover rates.
“The administrative management will be particularly beneficial in assisting us with employees that leave the business but retain smaller pension pots,” says Parker-Welch.
A word on communication
An initial criticism of master trusts was that while they are a good way of managing administration, they could fall short when trying to align the communications need with individual companies.
However, in the case of Marks and Spencer it is able to create bespoke information for its company.
Another benefit of a master trust is the company does not have to provide reams of additional information that may confuse employees.
Hymans Robertson head of DC consulting Lee Hollingworth mentions that with contract-based plans, they are regulated by the FSA and under the Financial Services Act, so a whole range of additional information needs to be provided.
“This may or may not be helpful to members in terms of how the plan works,” adds Hollingworth.
“So under the master trust solution (or any trust solution) the employer is able to communicate with members how they want to, rather than be dictated by having to provide a key features document.”
In most cases the independent trustee and the provider of the master trust will produce communications in conjunction with each individual company.
The initial process is a communications briefing where the master trust provider will try to understand what the expectations are.
“This is where we sit down with the employer and their advisers to work out what their communication strategy is, both online and offline, and we work with them on the execution of those requirements, often in a bespoke manner,” says L&G’s Filbin.
