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A DB master trust provides a new option for employers and scheme trustees looking to manage legacy pension liabilities while protecting benefits for members.
How does a DB master trust work?
As the name suggests a DB master trust is a multi-employer scheme for defined benefit pensions. It offers centralised administration, shared investment services and a professional governance structure, helping to professionalise schemes. These significant economies of scale can reduce the cost of managing a DB scheme for sponsoring employers, while also ensuring ongoing regulatory requirements are met.
But unlike a DC master trust, individual schemes are not pooled together. Instead each DB pensions that enters has its own section within the master trust and the liabilities remain on the employer’s balance sheet.
Why might employers consider a DB master trust?
In the last couple of years there has been increased regulation around DB schemes, with the Department of Work and Pensions consulting on the proposed new funding
and investment regulations. Although full details have yet to be finalised, it seems clear this will strongly encourage schemes to reduce their dependency on the sponsoring employer and move towards lower-risk portfolios to manage liabilities. This will push schemes towards a more efficient system of governance and a more effective risk framework, both factors which are likely to make consolidation more attractive. A DB master trust is one option, alongside a superfund, a buyout option, or appointing a professional trustee.
What advantages does a master trust offer over other consolidation options?
Many schemes opt for a professional trustee, but this can be expensive, particularly for smaller and medium-sized schemes – as it adds cost without reducing other fees. Other options involve severing the link to the sponsoring employer, enabling the sponsor to offload the pension scheme from its balance sheet. However, for many, the price of this risk transfer is not yet affordable.
For many schemes an insurance buyout is the ultimate goal, as this is the best way to guarantee member benefits while shifting scheme liabilities away from an employer’s balance sheet. But there can be a lot of hoops to jump through before schemes are in a position to do this. For example trustees will need to completely data cleansing to achieve GMP equalisation. A buyout also depends on them being able to get a quote from an insurer at an affordable price.
A DB master trust can be a cost effective means of professionalising a scheme, and it is also an efficient stepping stone on the way to eventual buy-out. For smaller schemes in particular, this can give access to a funding and investment strategy that has this longer-term objective.
What does abrdn offer in this market?
abrdn launched its DB master trust in September 2022, in conjunction with XPS Group — the first DB master trust launched as a collaboration between an investment manager and employee benefits consultant. XPS provides actuarial and consultancy services for schemes joining the master trust, while abrdn has created a series of model investment portfolios which can be flexed to the needs of individual schemes. When a scheme enters the master trust abrdn can look at the strength of the covenant, analyse what this means in terms of the investment risk that can be taken, and then deliver an appropriate funding strategy.
What other benefits are offered?
abrdn has an agreement with a large insurer to provide quotes on bulk purchase annuities for schemes below £50m. Prior to this there have only been two insurers willing to provide quotes for schemes of this size, so this increases choice. The abrdn master trust can also offer a range of financial wellbeing and education services, via the member portal, as well as access to specialist wealth management and advisory teams, a feature increasingly recognised by HR reward departments today.
How has recent market turmoil affected the sector?
The significant volatility in gilt markets has created challenges for schemes holding sufficient liquid assets to support LDI
positions. In times of economic crisis, clearly defined delegations within the master trust structure can create more efficient and effective decision-making.
It is worth noting though that higher interest rates have been broadly positive for DB schemes, with funding levels improving. This could open up additional options in managing liabilities over the longer term and may mean schemes are closer to a buyout. But if lots of schemes are in this position this could
affect capacity in the market, particularly for smaller schemes.
Within our DB master trust we are open to speaking to any scheme, regardless of size or funding level. Because each scheme is ring-fenced, there is no funding level threshold for acceptance into the trust structure.
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