The continuing growth of master trusts

We see the move to master trusts as part of the trend for employers to outsource non-core activities. Interestingly, while we have seen an increase in the pace of movement to master trusts, there has been no major new legislative compliance issue to fuel this trend. Instead the need to simplify the whole process of providing benefits to employees, and minimise executive and administration time, have been major drivers.

Master trusts also offer attractive features such as multiple investment options which are difficult for the average stand-alone scheme to include cost-effectively.

Criteria for selection
Criteria on which to evaluate scheme providers include:

• the range of investment options, which should be sufficient to cover the risk return profiles of the members,


• the choice of managers available, and the construction of the managed funds,


• expected future investment performance, and confidence that it will be achieved,
• the level of fees,
• the fees charged if a member leaves service but continues to save in his/her own right,
• servicing options, including the ability to access accounts via the web, and whether service levels vary across the country,
• the reputation of the provider and its people,
• whether the provider is well-established or a new player,
• administration abilities, and
• insurance options.

The relative weight given to each of these varies according to the employer's needs.

Investment fees
The following table shows the ranges of fees charged by the schemes, split by managed and sector-specific funds.

The range for the sector-specific funds is often greater than for the managed funds reflecting the high cost of managing overseas share portfolios.

The lowest fees are charged by Planit (PLA), while Mercer has the highest fees overall. Most providers will negotiate on fees.

Transfer issues
Since New Zealand law does not allow block transfers of members from one plan to another, employers have two options when switching to master trust arrangements:

• obtaining member consent, which gives the important advantage of continuity, and


• winding up the existing plan and starting again.

The crucial issue for employers is to ensure that no members are left in the existing plan. Arguments that might be used to persuade members to consent to the transfer include:

• up to date benefits and structure;


• member investment choices, and choice of fund managers; and
• the option to take a cash lump sum as part of the transfer.

Where an employer is not confident that all members will transfer and therefore decides to wind up the existing plan, members need to make a positive decision to reinvest their funds in a master trust.

Employers are often disappointed with the low proportions of members transferring when given the option, as members sometimes prefer to use their funds for non-retirement purposes.

Moving members from defined benefit arrangements is inevitably more complex than from a defined contribution scheme, as employers must also deal with the transition to a different form of benefit.

Older members might be put off by:

• relatively generous existing benefits, and


• the uncertainty of future investment returns.

Investment only options
Mercer, GRT and AXA offer trustees the ability to invest in the available funds while retaining their own trusteeship and scheme administration. This provides a cost-effective specialist manager configuration suitable for smaller schemes with automatic manager reviews.

As of yet few schemes have taken this option and it will be interesting to see whether the number will grow.

The role of the Adviser
The adviser can take a number of different roles which include:

• assistance in selecting the master trust and then leaving it to the provider to present the scheme to employees,


• presenting the new scheme to members so giving them added confidence in the provider, and
• completing regular reviews of the scheme and reporting to members.

It is important to note that some advisers are associated with master trust providers.

Employers should seek independent advice on the options available to them.

Mark Weaver is a principal at consulting actuaries Melville Jessup Weaver.

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