Mastering the compliance burden

The compliance and governance responsibilities for pensions have always involved work but those standards have been raised under the EU’s IORP II directive. This has seen substantial consolidation in the sector, with around 36 per cent of one-member schemes and 48 per cent of group defined contribution schemes moving to PRSAs or master trusts.

That’s a whole lot of movement involving terms that might baffle the lay reader. The key questions an employer must ask is: what do they gain from moving and what do they give up in the process?

The reason for this consolidation is rooted in complexity, as employers have found maintaining their own schemes an onerous challenge.

“Quite simply, the bar to manage such a scheme got higher, driving a lot of employers to seek alternatives,” says Helena Dorrigan, pensions specialist at Davy.

The situation has changed for employers as there are now stronger requirements across governance, compliance and specialist oversight.

“One of the main reasons is that pension schemes have become much more complex to run well following new regulations,” says Carol Leonard, head of master trust at Marsh Ireland.

“Stronger governance expectations, tougher compliance requirements and the need for specialist oversight have made it harder for many stand-alone schemes to keep pace. This regulatory environment has pushed master trusts to the fore.”

As is often the case with SMEs, the biggest challenge is time. Smaller businesses simply lack the capacity to handle this extra burden, and that’s before considering the additional expertise required.

“The honest answer is increased governance requirements leading to greater demands on time and increased governance costs,” says Neville Maxwell, head of business development for corporate pensions at New Ireland.

“Running a stand-alone scheme now requires a level of trustee expertise, time commitment and regulatory literacy that most small and medium employers simply don’t have in-house.”

Moving to a master trust offers assistance to employers as it changes where much of the governance and regulatory matters sit.

“Master trusts shift the onerous task of meeting regulatory obligations, and the associated risk of noncompliance, away from the employer and on to the master trust provider,” says Dorrigan.

“Employers may also benefit from reduced costs, with the possibility of reduced investment charges as they transition to new arrangements that benefit from scale.”

The upside of this is that employers can continue to offer an occupational pension without needing to manage its own trustee and governance architecture.

“For employers, a master trust allows them to provide a strong pension offering without having to create and maintain their own trustee and governance infrastructure,” says Leonard.

“It also brings cost advantages through economies of scale and helps reduce the operational burden of running a scheme.”

There’s also a scale advantage. With a master trust serving multiple employers, it can potentially administer pensions in ways that individual schemes cannot.

“Scale is the obvious one, with better fund pricing, stronger negotiating power with investment managers and administrative efficiencies that a single-employer scheme can’t replicate,” says Maxwell.

There’s more to the move than alleviating stress for employers. There are also benefits for individual members of these schemes.

“From a member’s perspective, a master trust preserves much of the autonomy that made single-member schemes appealing, while introducing the scale, compliance and oversight demanded by the new regulatory framework,” says Dorrigan.

On top of this, members can often benefit from great communication and engagement around their pensions.

“Members gain the comfort of a professionally governed pension arrangement with experienced specialists already in place, supporting stronger oversight, clearer communication and better day-to-day administration,” says Leonard.

The process as a whole also tends to be more digital, reducing the friction previously associated with pensions.

“Tasks that used to involve paper forms, phone calls and weeks of delay – joining the scheme, switching funds, updating a beneficiary, requesting a retirement quote – now happen in minutes through a digital platform,” says Maxwell.

It’s not all sunshine and roses. While the burden is reduced, so too is the direct control for employers. That’s why the move should be treated as a serious project for a business.

“Employers should consider whether a one-size-fits-all approach works for the entire employee base across the company. The needs of the senior management will differ from those of the wider employee group,” says Dorrigan.

Employers don’t appoint trustees to a master trust, which also has drawbacks that need consideration.

“The main trade-off is flexibility. Employers do not appoint their own trustees, because the professional trustee board is already in place, and the arrangement must operate within a common governance structure,” says Leonard.

That’s why employers can’t just see this as a quick fix. Everything about the move needs to be examined thoroughly in order for it to work.

“It’s also worth employers doing proper due diligence on the master trust provider itself. Trustee independence, digital capability, member education and engagement all vary significantly across the market,” says Maxwell.

“Not all master trusts are built the same, and the value-for-money case only holds up if the provider is genuinely investing in service quality, not just scale.”

At the end of the day, it all comes back to balance. The compliance burden is rising so employers need to find a solution that best suits them and their staff in order to meet it while still delivering what’s expected. With the right advice, a successful transition can offer real benefits to all parties.