News / 03.02.21

5 reasons your pension scheme would be better off in a DB master trust - LTO

Increasing running costs and stricter expectations from the Pensions Regulator are just some of the challenges facing employers and trustees of DB pension schemes. Many schemes would be better off in a DB master trust to overcome these challenges. From accessing better investment returns, to cost sharing benefits and economies of scale, we explore the 5 key reasons why you should consider transferring your scheme into a master trust like Citrus.

Reason # 2: Reach your long-term objective with more certainty

Setting and reaching your scheme’s long-term objective (LTO) is the ultimate consideration for all DB pension schemes, and The Pensions Regulator’s new DB funding code will require a single long-term objective for all schemes, regardless of scheme size and covenant. Trustees and sponsors will need to consider their ultimate goal and set a clear plan for getting there within a realistic timescale.

What are the options for your LTO?

The DWP provided four examples of suitable long-term objectives in its 2018 white paper:

  1. Running-on with employer support (for schemes still open to accrual)
  2. Reaching for self-sufficiency with low-risk investment strategy and minimal call on the sponsoring employer
  3. Buying-out with an insurer
  4. Entering a consolidation vehicle within an agreed timeframe

The majority of trustees are now targeting buy-out, whereby an insurer takes on the responsibility of paying out pensions to members1 The insurer carries the associated investment and inflation risks, as well as the risk of members living longer than expected.

This is a particularly attractive option, so demand from pension schemes to complete a buy-out is increasing. So much so that demand now outweighs insurers’ capacities to write business at their best prices. Insurers therefore have more choice around which pension schemes they wish to offer their best terms to. Appetite to secure benefits for smaller schemes is particularly limited.

The small scheme journey to buy-out 

This is where a master trust can help. Moving to a master trust is a great way for smaller schemes to access the same insurance opportunities as larger schemes, at an attractive price.

Grouping multiple schemes, or sections, into one trust at a point at which they’re all ready to transact provides insurers with a more attractive proposition and leads to lower buy-out costs. Subsequent wind-up costs are also reduced by sharing fixed costs amongst the employers in the master trust.

Staying on track

But what if buy-out is still a long way off? This is the case for most schemes. There are still some steps you can, and should be, taking now to keep your scheme on track and reach your goal with certainty.

Best practice is to adopt an integrated risk management (IRM) approach which:

  • aligns suitably strong technical provisions with your long-term goal;
  • quantifies investment risk, ensuring the covenant can support it; and
  • reduces investment risk through use of a capital efficient strategy.

As mentioned in reason #1, master trusts give access to better investment opportunities and more sophisticated strategies than typically available to many schemes. This extends to IRM. Citrus’ tried and tested IRM approach puts member schemes in a better position to meet their LTO. By considering funding and investment strategy together, we can identify the most appropriate combination of contributions and investment risk for each section in the scheme. 

To keep on track, member schemes have access to sophisticated funding monitoring tools such as ‘The Brain’, developed by Hymans Robertson, to help assess progress against long-term targets. This can be used to monitor changes in the funding level for MI purposes and to identify opportunities to de-risk the investment strategy where, for example, the funding level moves ahead of expectations.

All these solutions are typically inaccessible or unaffordable for smaller standalone schemes. Moving to a master trust can overcome these hurdles and lead to more certainty in reaching your long-term objective.

Meeting your long-term objective with more certainty is just one of the reasons your scheme may be better off in a DB master trust. Watch out for the next blog in our 5-part series where we look at how you can improve your governance standards and fulfil TPR expectations.

Whatever your long-term objective, find out how Citrus can support you in reaching it. For further information please contact Lindsay Davies.

[1] Hymans Robertson’s Trustee Barometer research 2020