Breaking up is hard to do: Managing master trust moves

As the defined contribution (DC) master trust space matures, a ‘secondary market’ has emerged as employers and trustees consider switching from one master trust to another.   

However, just like any relationship, navigating the ‘split’ can be tricky. 

When an employer or trustee board first selects a master trust for their future service DC pension provision – or receiving vehicle for accrued DC pots – they will likely have chosen that master trust based on their view of its offering and ‘fit’, compared to other options available in the market at that time. 

It is unlikely, particularly for employers and trustees who were early movers to master trusts, that they paid much attention to what would happen if they ‘fell out of love’ with their chosen provider’s master trust. 

Having doubts?

There could be a variety of reasons for an employer or trustee board to consider ending the relationship with their first master trust, whether that be because there has been a corporate restructuring forcing a split, a downturn in service provision, or newcomers to the market offering a preferential proposition. 

Just because an employer or trustee board has decided it wishes to ‘split’ from its original master trust, it’s not necessarily that simple to implement.

In light of the government’s recent consultation seeking views on whether employers should be carrying out periodic reviews of their pension arrangements, this trend of ‘moving on’ is even more likely to continue. 

However, just because an employer or trustee board has decided it wishes to ‘split’ from its original master trust, it’s not necessarily that simple to implement. 

The legal documentation for the master trust may not permit a bulk transfer of assets out. Operationally, the transferring master trust may not be able to make bulk transfers without member consent.  

The various parties involved have different roles in determining what happens to members’ pension savings and potentially this can lead to a difference in opinion as to whether the ‘break-up’ is the right decision. 

If accrued DC pots are to be transferred to another master trust, it is the master trust trustees who decide if it is in members’ interests – both those transferring and those remaining within the master trust – to make the transfer. This is often based on a value for money assessment. 

However, currently there is no legislation, guidance or standardised practice in place to determine what criteria should be used in making this assessment. And, in practice, do wider commercial interests come into play? 

For future service pension provision, this is primarily the employer’s decision. But an employer isn’t responsible for deciding whether to move accrued pots to a new master trust too, even though it may want to do so for paternalistic or commercial reasons. 

From a commercial perspective, if the transfer is only of deferred pots, the total asset value is low or the membership is ageing, a receiving master trust may not want to receive it. 

There may also be practical hurdles that make it difficult for a receiving master trust to accept the transfer, such as tax protections or limitations on receiving crystallised transfers. 

Lessons learned

Employers and trustees selecting a master trust should understand what the medium- to long-term intentions of their choice are in terms of its growth plans. 

This is particularly important in light of the proposed Value for Money framework, as well as the government’s drive for further consolidation and recent proposals on the expected scale of master trusts. 

In other words, are they in this for a long-term relationship or is it just a passing romance? 

As part of the initial procurement and onboarding process, employers and trustees should seek to understand from the master trust what the ‘divorce plan’ is in the event the employer or trustees want to move away in the future and ensure this is documented, akin to a pre-nuptial agreement. 

Emma Martin is senior counsel at Sackers