In part two of our special report into fiduciary management for DC, Laura MacPhee considers whether master trusts might be a better alternative for DC schemes

If trustees are pressed for time, perhaps they ought to consider outsourcing completely to a master trust that can handle investment, governance and communications on behalf of the scheme.

The two are not mutually exclusive, say Aon Hewitt’s Sophia Singleton. Referring to the new governance structures that have been emerging, she suggests that “a delegated solution sits in the middle, between an own trust and a master trust”.

The route the employer chooses will depend on its objectives and the amount of control and governance it wants to retain.

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P-Solve’s Hoffman-Jones reminded delegates at Pensions Insight’s recent DC Insight conference that even when a scheme does choose the master trust route the employer ultimately retains responsibility for meeting its pensions obligations.

Ashish Kapur, head of European institutional solutions at SEI, says: “Whether you choose to outsource it to a master trust or do it yourself, the default thinking is the same.”

Whether you choose to outsource it to a master trust or do it yourself, the default thinking is the same”

That is the idea behind the SEI master trust, which incorporates fiduciary management into its default strategy. “In our arrangement the trustees are handling it like we would any other fiduciary management mandate.”

The Pensions Trust employs Cardano to look after its members’ legacy schemes in a DB context, but it was appointed to address a specific problem while the trustees carried on with the day-to-day running of the multi-employer trust.

Meanwhile, Darren Philp, director of policy and market engagement at The People’s Pension, speaking specifically about DB funds, says”fiduciary management can have a role to play when trustees are grappling with difficult decisions.”

Fiduciary management can have a role to play when trustees are grappling with difficult decisions.”

In these DB schemes there is a “real relationship between the employer and the trust”, he adds, because the trust is dependent on contributions from the employer, and the employer is taking on the risk the scheme’s investments will underperform.

“You can see very clearly how that would have happened in a DB world, where trustees used to meet on a quarterly basis and make investment decisions over a six-month time horizon,” says Richard Butcher, an independent trustee and the managing director of PTL.

“Actually we have exactly the same issue with DC. A lot of trustees treat their investment decisions in DC as if they’ve a very, very long time horizon.”

There is less of a compelling case for fiduciary management in the DC world”

There is less of a compelling case for fiduciary management in the DC world, where it is the employee who takes the investment risk and pays the fees.

It may be harder to justify paying for an extra layer of governance to DC members who have been auto-enrolled and may not understand the roles that existing providers play.

It would not be unreasonable for a member to expect the company’s pensions team to take the most streamlined and cost-effective approach to pensions provision, given that many savers have had their money put into the scheme without being asked.

Butcher argues that fiduciary management is only costly when compared with passive funds. “The whole point of fiduciary management is that it is a mechanism that allows trustees to delegate some decision-making to a party who is much more proactively involved in the market, and as a result can react to or can anticipate changes that the trustees might not anticipate or react to in a timely manner.”

Fiduciary management is only costly when compared with passive funds”

“If you had a very active investment management policy with active managers in there, then fiduciary management might make a difference,” says Jane Wilson, Caterpillar’s pensions manager.

“But you’re only likely to have actively managed funds in DC if you’ve got quite a big fund. If you’ve got a massive fund does that mean you’re likely to be a larger company, and therefore you’ve got access to more expertise, anyway?”

She goes on to give the example of big banks that may choose to use their internal knowledge to plan their investments, both as a cost-saving measure and to uphold their reputations in their field.

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