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Defined contribution master trusts. What are they?

Pension trusteesThere’s much confusing pension jargon to get to grips with when you set about choosing a workplace pension scheme for your employees. Master trust and defined contribution are two of the phrases you’re likely to come across.

A defined contribution (DC) pension builds up a pension pot using your employee’s contributions, your contributions, plus investment returns and tax relief. This differs from a defined benefits scheme where the amount you get is based on how many years an employee has worked for the employer and the salary earned.

A master trust is a pension provider that manages a pension fund for several companies at the same time. Master trusts are DC schemes.

Setting up a pension scheme can be costly and inconvenient, especially for small firms, so this is why master trusts are proving popular for auto enrolment, as the trusts deal with setting up and the administration of the scheme for many companies at the same time.

There is one board of trustees who govern the way the trust is run and who must look after employees’ interests in line with the rules of the trust. The Trustees now have to comply with the duties set out in the Pension Schemes Act 2017, which received Royal Assent at the end of April.

It’s sensible to look for a pension scheme that’s regulated by the Financial Conduct Authority or is Master Trust Assurance Framework (MAF) accredited.

MAF has been developed by the ICAEW in conjunction with the Pensions Regulator. It’s a voluntary framework providing an independent review against an industry-wide quality standard.

All pension schemes that want to join TPR’s list of accredited schemes are required to provide an independent report confirming that they’ve met the standards set out in the framework.

“Master trust assurance allows trustees to demonstrate their scheme has obtained an independent review of their governance standards and controls against a defined set of ‘control objectives’, which have been designed to align with the standards in our DC code and our DC regulatory guidance,” said Andrew Warwick-Thompson, Executive Director at TPR

“We believe that large well-run master trusts which have obtained assurance are a good choice for employers seeking to comply with their automatic enrolment duties.”

The Pensions Regulator has a list of schemes that are open to small employers.