Banishing Moving Blues: Navigating the Nuances of Moving to a Master Trust (Part 2)

Remember how you felt when you could buy your first home? You didn't have to pay rent any longer! Do you also remember how you felt when you realised how much more it would cost by the time you paid taxes, legal fees, survey costs, broker commissions and mortgage fees? That's even before you had to think about costs of the physical move, renovations, repairs and new furniture. They all add to those moving blues!

Moving to a master trust can cause the same feelings; at first, there is optimism and a promise of future cost savings, but if not planned properly, costs start racking up quickly. In this second part of my series of articles, I navigate some of the costs that are typically incurred in moving to a master trust.

Part 2: Costs

Moving to a master trust is no easy feat. It's unlikely that most employers will have the resources to make the move on their own and so will need to employ advisers, just like how you might work with brokers, lawyers and removal companies when moving homes. Legal, investment, pension, communication and actuarial advisers are often involved in selecting and moving to a master trust. Employers should carefully set out their plans for any move to figure out where external advice is needed and the scope for it. This will help in getting clearer fee quotes from advisers and controlling the costs of the move.

It’s very rare to move home without carrying out some repair, renovation, or at least improvement, work. Likewise, when moving to a master trust, these costs can arise in various ways. For example,

• 'repair’ costs can arise in cleaning up data records before the transfer.
• 'renovation’ costs can arise if an employer wants to make changes within the master trust (e.g. it can be possible to design their own investment options);
• ‘improvement’ costs can arise if an employer wants to provide additional tailored features for their employees (e.g. communicative media/literature), to supplement what is provided by the master trust.

These costs can be known in advance as they are largely dependant on the employer's objectives and the master trust’s capabilities - yet again highlighting the case for meticulous preliminary planning.

The next level of costs comes from complying with the requirements of the actuarial certification when transferring employees’ existing savings to a master trust (discussed more in my previous article). Asides from the adviser costs in relation to this, employers may find that they have to pay for

• any higher ongoing charges applied to employees’ savings within the master trust (jargon: member-borne fee differentials);
• costs arising from trading investments during the move (jargon: transaction costs); and
• any missed investment gains arising from time gaps between the trades to move to the master trust (jargon: out of market exposure).

These costs can be substantial and impossible to definitively quantify before the transfer, as they depend on (investment) market conditions when the transfer occurs. The actual costs are only known after and can be the most significant costs of the move. However, there are often ways to estimate, contain and reduce the expected levels of these costs. Hence, it is vital for employers to work with their advisers to carefully analyse and control these costs. Employers should then provision for such costs as part of the overall budget of the move.

The costs discussed in this article are the common costs that an employer might meet when moving to a master trust, but by no means are an exhaustive list. Even if costs might seem large over the immediate future, they should not prevent a move if there are long term benefits to be had, especially for employees. After all, just like moving homes, despite encountering all the costs mentioned earlier, people still do it every day.

In the next article in this series, I'll take a closer look at some of the logistics involved in moving to a master trust and what employers may wish to factor into their plans.

Disclaimer: The contents of this article are the intellectual property of the author, representing the views of the author only, in a non-business capacity. The contents of this article do not represent the views of any employer or organisation affiliated with the author, both past and present. Moving to a master trust requires specialist and regulated advice, which should be sought throughout the process, from consideration through to completion. No part of this article constitutes advice of any nature, regulated or otherwise.