We’ve been fascinated to watch the recent debate about extending the use of open multiple employer plans (MEP) in the United States, and liberalizing some of the conditions under which they can be used. In effect, the Master Trust model that we use in the United Kingdom, and industry superannuation funds in Australia, closely resemble that of an open MEP.
In the UK, the introduction of auto enrollment sparked a growth in Master Trusts. Back in 2012 the UK government introduced new pension laws which meant that all employers were legally obliged to automatically enroll their eligible workers into a workplace pension plan that meets certain standards. As part this change, the Government created NEST. NEST is a multi-employer, trust-based workplace pension plan that’s free to use and open to any employer wishing to use it to meet those new duties. Alongside NEST, other similar Master Trust schemes have emerged operating on a similar basis – independent trusts, usually operating on a form of mutual basis, sometimes also referred to as “profit-for-members.” These provide a complete off-the-shelf workplace pension package for employers.
Overlaps and differences between systems
Direct system-to-system comparisons of course require caution. Perhaps the biggest difference in how the US and UK retirement systems operate is how and where the fiduciary duty resides with respect to workplace pension decisions. While employers in the UK have always been able to establish their own occupational plans, it’s the trustees of those plans, not the employer per se, that have fiduciary obligation to participants. This single-employer model is also now less common in the UK (and has never been common among smaller firms). More often, employers will fully outsource their pension arrangements to a third-party provider under one of two types of arrangement: a plan with an insurer or one of these newer Master Trust arrangements. The providers of these plans have obligations to participants, namely the ‘treating customers fairly’ framework for insurers, and traditional trustee fiduciary obligations within Master Trusts. But in all cases, the employer itself has no direct fiduciary responsibility, merely a compliance obligation to select a “qualifying” scheme.
Helping small employers through innovation and scheme design
That said, the experience of smaller employers in the UK in complying with their auto enrollment duties, and of NEST and others like them in helping them, suggests that the open-MEP structure can definitely help smaller organizations establish good pensions for their workers.
In the UK context, nearly 1.5 million small and micro employers have had to comply with their auto enrollment duties in the period since June 2015. For the many who didn’t previously offer a plan, the perceived costs and administrative burden of doing so was a major concern. Fortunately, many UK Master Trusts were aware of this and designed their approaches to minimize this burden. Some schemes, like NEST, created innovations with small business in mind. An employer using NEST can set up their relationship with us directly, through our website, or in many cases from within their payroll software, thanks to our API-based integration with many of the major payroll providers. Employers can also nominate a third-party to administer and manage NEST for them, thanks to our NEST Connect interface which allows these third parties to register and manage multiple small firms through a single platform.
These innovations have helped make the process of providing a pension easier, particularly for smaller organisations. Our evidence suggests that a small employer can set NEST up in 45 minutes and then administer it with just a few more minutes of effort each month.
Peace of mind and economies of scale
Crucially, the Master Trust route also offers peace of mind. NEST has nearly seven million members and serves large and small employers side by side. Importantly, the advent of auto enrollment, and the new market it creates, has also seen other Master Trust providers emerge, and achieve significant scale. The two next largest after NEST also have memberships in the millions, while the Pensions Regulator identifies around ten in total who are committed to taking small firms (though some are tied to consultants or insurers, as opposed to fully independent).
The scale achieved by these large Master Trusts enables them to drive economies in administration and investment. Members of NEST for example have access to an award winning, sophisticated investment strategy that is professionally overseen and managed, sat within a fiduciary framework, all at a low overall charge level. Employers themselves pay no additional charges to access NEST.
Access for all to high quality pension provision
When the UK pensions commission first recommended establishing NEST, and the government picked up on the idea, one of the goals they referenced was ensuring that those working for smaller firms could have access to the same quality of pension, at the same low charges, that were already available in the major corporate sector. That’s the promise of a Master Trust or open MEP structure. For the saver, they have access to the benefits of a large, well-governed plan. For the sponsoring employer, they benefit from vastly reduced complexity and administrative burden compared to trying to set up and run their own plan for employees. Increased access to this kind of structure should be good news for small businesses and their employees alike if the changes proposed in the US gain traction. We look forward to watching as this debate progresses.
Will Sandbrook is executive director of NEST Insight.
The views and opinions of the author are his own and do not necessarily reflect the view of The Aspen Institute Financial Security Program or its funders.