Master trusts could lead to poorer retirement outcomes than group personal pensions, as these schemes don’t allow for adviser charging, Royal London has claimed.

In its 24-page policy paper Group Personal Pension or Master Trust? – A guide for employers published last week (April 25), Royal London stated if employees are enrolled into a master trust they may be less likely to find the cash to pay for financial advice.

In the report the mutual insurer stated it is widely accepted that there is an advice gap in the UK, with too few workers taking financial advice when planning for their retirement and when making other key financial decisions.

One way to make advice more affordable is for the cost of ongoing financial advice to be deducted from a member’s pension, rather than having to be funded out of the member’s bank account.

However, while most Group Personal Pensions (GPPs) will facilitate this, master trusts do not.

Royal London stated “a steadily growing secondary market is emerging” where employers consider whether to change the provider of their workplace pension.

This is due to the fact that all companies have passed their initial staging date for auto-enrolment, and many are now starting to review whether their existing workplace pension scheme is providing the best outcomes for their employees.

The mutual insurer’s paper analysed the merits of group personal pensions and master trusts, the two main types of workplace pensions.

According to figures from The Pensions Regulator, by 2017/18 amongst those employing more than thirty employees, around 53,000 employers were using a master trust for auto-enrolment, and some 33,000 employers were using a group personal pension.

Key differences between the two types of scheme

  • Charging structures: most group personal pensions operate a flat percentage annual management charge, whilst some master trusts have a more complex charging structure, involving either a one-off contribution charge (such as Nest) or a fixed monthly fee (Now: Pensions) in addition to an AMC;
  • Governance: in a group personal pension member interests are overseen by an independent governance committee, which publishes an annual report and has powers to refer concerns to the Financial Conduct Authority; in a master trust, member interests are looked after by a board of trustees who have a ‘fiduciary duty’ to the members;
  • Delivering tax relief to members: an importance difference between the two arrangements is the way in which tax relief on pension contributions is delivered;  in a group personal pension, members receive tax relief through the relief at source method, which ensures that all members automatically receive tax relief at the basic rate, with higher earners claiming additional relief through the tax return process;  with most master trusts (excluding Nest), tax relief is delivered through the net pay arrangement where workers get tax relief at their marginal rate when they contribute;
  • At retirement options: most trust-based pension schemes were designed for a world where the usual outcome at retirement was to buy an annuity; in a world where the FCA now expects savers to be given “a range of ready-made drawdown investment solutions”, many master trusts are having to improve their at retirement options;  most group personal pensions already offer a relatively smooth transition from the period where a worker is building up a pension to the process of drawing on that pension pot, taking advantage of pension freedoms.

Sir Steve Webb, director of policy at Royal London and former pensions ministers, noted that “it is a healthy sign” that employers are keeping their workplace pension arrangements under review, and looking to make sure that the scheme they used to fulfil their auto-enrolment duties is “still fit for purpose”.

He said: “Both master trusts and group personal pensions have important roles to play and there are examples of high quality in both types.

“But employers need to understand the strengths and weaknesses of each, and we hope that this guide will assist them in that choice.

“Whether it is charging structures, governance, delivery of tax relief or options at retirement, employers and their advisers need to make sure that the features of their chosen scheme are helping workers to get the best pension outcomes.”