Executive summary

The pressures of rising costs, added complexity, and a growing governance burden have resulted in many defined benefit (DB) schemes reconsidering how best to deliver their legacy pension promises. DB master trusts are becoming increasingly popular as an optimal solution for many sponsors.

Whatever your DB pension scheme journey, we believe a DB master trust can help you achieve your objectives. Read on to find out how.

What is a DB master trust?

A DB master trust is a multi-employer pension scheme for non-associated employers. It enables schemes to pool together to benefit from economies of scale, while ring-fencing assets and liabilities to avoid cross-subsidies with other schemes. We believe there are six clear DB master trust advantages, with the power to smooth the journey to your desired endgame.

Can DB master trusts support robust governance?

Against this regulatory backdrop, it’s no wonder that the trend towards fully professional governance models is gathering pace. But how can small schemes meet the latest governance requirements without breaking the bank?

Increasing demands

Current rules place increasingly burdensome demands on trustees and sponsors of defined benefit (DB) pension schemes. Meanwhile, the number of members employed by sponsoring companies and willing to step in as trustees is decreasing, and the knowledge gap caused by the increasing complexity of regulation is also becoming much more apparent. Tightening regulations can feel even more painful for smaller, less well-resourced schemes.

What does this mean for DB scheme governance?

Regulatory expectations – not to mention potential future changes in legislation – mean the time cost of 'in-housing' certain services to manage DB pension schemes is just becoming too much. It is more important than ever for DB scheme governance models to include industry professionals with different areas of expertise, including professional or independent trustees and advisers in multiple fields. The table below shows some of the professionals whose services are essential for today’s governance models:

Impact on sponsoring employers

Aside from the cost impact of employing professional advisers (we will pick this up in another article), it’s important to recognise the number of stakeholder relationships that will need to be managed and the additional time required to do so.

But what is the alternative? Without these professional advisers in place to help manage day-to-day scheme requirements, the governance model may be deemed inadequate and there is an increased risk that the regulatory requirements are not met. For example, the gilt crisis in September 2022, highlighted that having a robust and nimble governance structure made a real difference to the financial outcomes of schemes and was not just ‘window-dressing’. For smaller schemes with less resource and funds to support expenses, the only option may be to hire in outside advice.

Could a master trust provide a solution?

Consolidation is gaining momentum in the DB industry, with master trusts available to help small-to-medium-sized DB schemes facing these problems. Through economies of scale, master trusts allow small schemes to access expertise on a cost-effective basis – such as external legal and covenant professionals – that simply would not be economically viable on a standalone basis. Would you rather pay 100% of professional trustee costs or an equal share of a single scheme fee?

The abrdn pensions master trust operates a ‘one-stop-shop’ approach with professional service providers appointed for every key area, as you can see from the table below.

This model is designed to take away the governance burden entirely from the current trustees, remove any trustee succession problems and provide reassurance to the sponsoring employer that the scheme is being run professionally. The main driver for all of this? Better outcomes for members and better value for sponsoring employers.

Can a DB master trust enhance investment governance and improve outcomes?

The importance of a good investment governance model was brought to light during the period following the UK’s ‘Mini Budget’ in September 2022, when gilt market volatility was at an unprecedented level. The impact of this on defined benefit (DB) pension schemes was significant. Trustees and employers were required to make decisions and implement solutions in very short periods of time.

Outcomes varied by scheme across the industry. Those that successfully navigated through this period typically had efficient governance models in place and could react to bond market movements in a timely manner. However, others found that the short decision-making timescales challenged their governance models, and this resulted in serious setbacks for some schemes.

The right strategy at the outset

Agility and flexibility are important as they help your investment strategy stay on track. However, investment governance isn’t just about being nimble in the operational sense. It is equally important to set the right strategy at the outset.

What does a good operational investment governance model look like?

Good operational investment governance models may differ depending on the level of delegation from scheme trustees and sponsoring employers. However, all good models have the ability to act fast thanks to dedicated resourcing and strong investment expertise.

This could include speedy investment decision-making, arranging for documentation to be signed rapidly, or quickly determining where monies need to be sourced from. A master trust provides a compelling solution for many schemes, because it can offer these services along with several other benefits.

A nimble investment governance model is a particular focus for the abrdn pensions master trust, given abrdn’s asset management capabilities. Furthermore, for our service providers, pension scheme governance and operations is their day job. This means that the time and experience they bring to the table adds value.

The benefits of a common investment manager, adviser and trustee

The abrdn pensions master trust has a single asset manager, professional trustee and investment consultant covering all advice. Let’s conclude by looking at the benefits of using a common investment manager, investment adviser and trustee across all sections.

With professionals covering all aspects of the abrdn pensions master trust, you can be confident that your section will have a solution to meet your objective – whether it’s buyout, run-off or growing a meaningful surplus.

Could a DB master trust help you fund your scheme more efficiently?

Regardless of the answer, the key focus is clear – efficient investment.  The abrdn pensions master trust can help small schemes achieve this aim. It can also provide a more efficient link between investment and funding strategies, leading to a reduction in funding cost for many schemes. 

Mansion House 

The Mansion House announcements and associated DWP call for evidence on DB pensions have fuelled debate around whether DB pension schemes should have more flexibility over their long-term objective. In particular, should there be legislative and regulatory changes to make it more viable for schemes to run-off over time, as opposed to the mass herd towards insurance buyout which currently seems likely to be the default route?  

The government's motivation is to encourage investment in the UK, which could take a variety of different forms but, in essence, should result in a greater allocation to UK equity and other forms of productive finance than the current £1.4 trillion of DB assets provides for.

To re-risk, target low dependency or buy out with an insurer?

We are expecting more detail on the Mansion House announcements when the chancellor makes his Autumn Statement (expected November 2023). The Work and Pensions Committee is also expected to report back on its conclusions from its ongoing inquiry into the future of DB pensions in early 2024.  Depending on the outcome of these key events, we may see further consultations on legislative and policy change.  

Given the current uncertainty over the direction of government policy on DB pension scheme funding, it is a challenging environment for pension scheme trustees and sponsors to be making decisions on long-term strategy.  Should they be going full steam ahead towards an insurance buyout?  Should they be exploring options for re-risking their investment strategy?  Should they be taking a ‘wait and see’ approach until there is further clarity on the chancellor’s Autumn Statement and the new funding code?   

The new funding code – does it mean loss of control?

Information released to date indicates that schemes will be required to set their funding and investment strategy in such a way that the scheme reduces risk over time towards a ‘low dependency’ target. What this means in practice is yet to be seen, but the Regulator has also indicated a set of ‘fast-track’ parameters that means schemes that are within such thresholds, will receive little to no regulatory scrutiny.

Adopting the pre-determined parameters could be inefficient for many schemes. It may also lead to trustees and sponsoring employers giving up a large amount of the control over scheme strategy. This could also negatively impact the cash funding costs required to close scheme deficits - in other words, place an overly cautious emphasis on the balance between cash funding and anticipated investment returns. 

But for schemes that deviate from this and create a strategy bespoke to their unique circumstances, additional documentation and justification of strategy could add to the already burdensome regulatory requirements - fine for large schemes, but perhaps less practical for small schemes.

How can the abrdn pensions master trust help?

The abrdn pensions master trust is well-placed to address all of the challenges set out above. Its investment strategies fit well with current funding regulations but are also well-set to react to any changes that come down the track.  

How is this achieved?  Through close collaboration with XPS Pensions Group, we have developed a range of investment solutions for the abrdn pensions master trust that can be out of reach for small to medium sized schemes. 

These are strategies with a range of returns appropriate for each stage in the funding journey.  For example, if your scheme is well-funded and targeting insurance buyout, then there is a model portfolio that closely aligns with insurer pricing. If your scheme has a significant funding deficit and requires more investment return to close the gap, then there is a model portfolio that delivers that with an appropriate reflection of the strength of the sponsor and the maturity of the scheme.  Coupled with a funding approach that is designed to reflect the underlying investments and is expected to align with the new funding code, it is possible to improve control of cash funding costs.

The principle is simple, and not a new one. As a scheme matures and its funding level increases, the reliance on contractual yield (providing a match for underlying benefit cashflows) increases. As you can see in our graphic below, this means a gradual rebalancing from growth asset classes such as equities into fixed income assets through time.

Where the abrdn pensions master trust excels is in the implementation. It provides small to medium sized pension schemes with access to a diversified range of fixed income assets – across public as well as private markets.  

A key feature across many of these model investment portfolios is that they utilise abrdn’s proven track record and expertise in managing fixed income portfolios to provide efficient investment strategies as a scheme matures.  This is achieved through significant allocations to asset classes which provide contractual income, with healthy yield margins over government bonds. This enables schemes to set integrated funding and investment strategies that provide for low volatility and attractive returns.  

Back in control 

Reducing your scheme’s running expenses with a DB master trust

Given today’s regulatory backdrop, there's an increasing need for professionals to be involved in the day-to-day running of defined benefit (DB) pension schemes. However, while industry expertise can help schemes meet regulatory obligations, external services come at a price.

The Pensions Regulator (TPR) has already published detailed analysis showing that the costs of running a small DB scheme are disproportionately high¹. These costs are expected to increase as small and medium-sized schemes navigate new regulations and TPR guidance primarily designed around larger schemes. Hiring industry professionals to improve governance is likely to add further expense (to find out which professional services are essential for today’s governance models, see our previous article).

Improving governance without raising costs

We believe small DB schemes shouldn’t have to choose between effective governance models and manageable running costs, because master trusts with professional service providers can help strengthen governance without increasing expenses.

Schemes can access significant economies of scale through a DB master trust. These savings are not available when schemes appoint standalone counterparts such as independent trustees, actuaries, and administrators.

A master trust has greater potential purchasing power than an individual small or medium-sized scheme. It can also deliver synergies by avoiding duplication of effort between sections. These synergies and economies of scale are passed on directly to the end-client in the form of low fixed running costs.

How much could you save?

What kind of cost reduction can schemes expect? The answer varies, depending on the scheme's current governance model and the master trust's governance model. Typically, we would expect a 30% reduction in running expenses.

Further additional savings can be achieved by reducing the cost of funding the scheme through efficient integration of the funding and investment strategy (you can read more about this in a separate article).

A reduction in running costs shouldn’t mean a reduction in service levels. In fact, for some small schemes, entry into a master trust can help improve service and cut costs.

How do we deliver savings?

Under the standard DB scheme operating model with a quarterly meeting schedule, 50 different DB schemes would typically result in 200 meetings per year. The abrdn pensions master trust has a common trustee and common advisers. As a result, we can cover 50 sections per meeting.

How? The same industry themes are common across sections. All sections invest in the same equity and gilt market and use the same building blocks to implement differing investment strategies.

These are just a few examples of how a master trust can be super-efficient. If you would like a detailed, tailored quote, please do contact us at DBmastertrust@abrdn.com.

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DB master trusts: enhancing member experience

For most people, their pension will be the largest source of income in retirement. It is therefore crucial that they understand their pension, plan for it, and know where to go to get more help if they need it.

Employers may be best placed to help with this, both in terms of day-to-day pension experience and financial education. For the current workforce, this can be a lot easier to achieve through auto-enrolment and internal communication channels. However, this becomes much more difficult when members no longer work in the business.

For large employers who have significant resource to dedicate to the cause, this is much less challenging. But many smaller employers lack this luxury, and this can be to the detriment of employees and members of their pension schemes.

Defined Contribution (DC) and Defined Benefit (DB) pensions master trusts can be a solution for these smaller employers, providing access to financial education supported by a high quality and efficient day-to-day member administration service.

Financial wellbeing in focus

These are challenging financial times for many, with the high cost of living, economic uncertainty and volatile markets making financial wellbeing a topical issue. Those with no savings will be seeing that their money isn’t going as far. Those with cash savings will be aware that those savings are losing value in real terms as inflation remains elevated, and those with investments are likely to be seeing any growth outstripped.

Higher interest rates are making mortgages more expensive at a time when everything else is more expensive too. It’s not surprising then, that according to the Money and Pensions Service, as many as 24 million adults in the UK don’t feel confident managing their money. Recent statistics from Champion Health show that financial pressure is the top cause of stress outside of work (above relationships, parenting, caring responsibilities, ill health and bereavement). Many companies are therefore acutely aware of this pressure.  

External support for employers

Employers are well placed to help their pension scheme members but may not have the resources to do that without some external support. Helping scheme members to engage with their pension, to recognise the benefits of saving into a pension and (for those lucky enough to have one) understand how their DB pension could support them in retirement, is critical. For some, it will be their first taste of considering their financial future. For others, it will be part of a wider financial plan. Either way, financial education for all and access to advice underpins financial wellbeing.

Pensions are clearly hugely important, and members need to understand the type of pension they have, and the options provided. We believe financial education should be wider than that. It should encompass everything from budgeting, saving and cashflow management, to understanding what’s going on in the economy and financial markets and why that matters. It should include knowing when an ISA might be appropriate, how insurance works, the importance of getting tax reporting right, having a Will and Powers of Attorney in place and how to make the most of tax allowances and reliefs.

Information access

Financial education is not just about a broad range of topics. It’s also about appreciating that different people want to access information in different forms. Some prefer short videos, others like more detailed written information, some prefer interactive webinars. All can be part of a comprehensive suite of materials available for master trust members.

Helping employees and members is about understanding that managing finances is a challenge for many – one that is causing stress and impacting work and life outside of work. It’s about knowing what you as the employer can provide support with, and what kind of support you need to bring in from outside of your organisation.

Pension scheme administration: what does excellence look like?

In addition to providing pension scheme members with financial education, and the option to take this forward to guidance or advice, a crucial factor in a member’s financial wellbeing is an excellent pension scheme administration service.

In our experience, if members have a question, they want to speak to someone that will handle their enquiry from start to finish, providing the human touch that is so often missing. Of course, members need support to be professional, expert and courteous but they also want to deal with people who will own the issue and respond to agreed deadlines.

Access to a dedicated specialist team with a specific phone number and a personal approach is particularly important. Many members contact their pension scheme due to milestones in their lives such as redundancy, divorce or bereavement.

Members want to feel reassured that when they call their pension scheme administration service, they will not be rushed off the phone and that there will be an empathetic, patient and friendly voice at the other end of the line. They also want to feel confident that they will be given all the information they require to make a decision.

Many members are not familiar with pensions jargon. A master trust which subscribes to the principles of the Plain English Campaign’s Crystal Mark ensures communications with members are clear and easy to understand.

Finally, given increasing concerns about the risk of scams, a dedicated Scam Protection team with the ability to identify and address any pension scam warning signs is an essential part of any administration service.

Coming soon

Could a DB master trust help smooth your buyout process? Find out in the final chapter of our series:

Contact us

If you would like to find out more, to help decide whether transferring your defined benefit pension scheme to a master trust could help your business, please contact one of our pension solutions specialists at DBmastertrust@abrdn.com.

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