Once upon a time, a final salary pension was considered to be the holy grail of pension options. If you were an employer and you offered one it helped to attract key staff and retain them once you got them on board. For many employees, final salary schemes offered security; a weight off your mind when it came to thinking about your retirement.
But not any more.
Final salary pensions (the most common sort of defined benefit pension) have been falling in favour for many years, with many employers abandoning them in respect of the ongoing pension provision for their staff. Now an increasing number of members of these closed schemes are choosing to ‘cash in’ their benefits and move from defined benefit schemes to defined contribution schemes, giving up their defined benefits to access some of the pension freedom opportunities introduced in April 2015. The movement is so large that the popular press now report the state of these movements on a near-weekly basis.
Defined Benefit pension scheme: a pension scheme which promises a specified pension payment at outset, based on a calculation involving earnings history, tenure and age.
Defined Contribution pension scheme: a pension scheme with a defined contribution for employees and employers, but not a defined outcome. The pension received by the employee will depend on several factors, including investment performance.
The full reasons behind the movement are complicated (don’t believe the simple explanations you’ll find in the mainstream media!) and can be covered elsewhere. For now, it’s worth thinking about what this means for the wider market and since Defined Contribution pensions schemes are the way of the future, then what should employers look out for?
We feel that the most likely inheritor of the ‘pension throne’ is the Master Trust structure of Defined Contribution pension scheme. Popularised as part of the Automatic Enrolment roll-out, use of Master Trusts has doubled amongst the FTSE 350 since 2015, a rise of 7%. During the same period, closures of defined benefit schemes were up 8%. Even if you are not a FTSE 350 firm, it is worth considering that trends in this area normally follow a ‘top to bottom’ mentality; what the FTSE 350 does today, your firm is likely to look at tomorrow.
Why then, do we feel that Master Trusts represent the future of pensions?
The nature of a Master Trust scheme is that many employers sign up to effectively use the same pension scheme for their staff – each is known as a ‘participating employer’ with the Trust. Typically the Master Trust is governed by a set of Rules that are enforced by professional Trustees, independent to each of the participating employers, thus applying the principles of good scheme governance in an equal and fair way to all members. Put simply, Master Trusts offer employers the opportunity of providing a professional run pension scheme for their staff but without a number of costs and minus some of the oversight responsibilities that come from maintaining their own arrangements, and with the ability to benefit from economies of scale that exist within such large pension arrangements.
Within the most modern of Master Trusts, employees are able to take advantage of all of the investment options found in any Defined Contribution pension scheme while still being able to take advantage of popular options, such as flexible drawdown; much in demand, since the introduction of pension freedoms and a commonly cited reason for a move away from defined benefit schemes.
We believe that if defined contribution schemes represent the future, then Master Trusts represent the future of defined contribution schemes. To read more about Creative’s own expertise in this area please visit www.creativepensiontrust.co.uk and speak to your Creative consultant, or email us on info@creativeeb.co.uk, to take the conversation about the future of pensions further.
Notes
The default position of the Financial Conduct Authority is that the transfer of a Defined Benefit pension is not in the client’s best interest.
Financial Advice should always be taken by someone considering transferring from a Defined Benefit pension scheme