Rose Leonard explains why Zurich will continue to provide its full suite of existing pension scheme solutions alongside the company’s master trust offering.
The argument for many ‘own trust’ pension schemes transferring into master trust arrangements may be quite compelling, but this is by no means the case for all schemes, and employers still have options. The main driver of this move into master trusts, which can accommodate multiple unrelated employer schemes within a single scheme, is the recent transposition into Irish law of the Institutions for Occupational Retirement Pensions II (IORP II) directive, which places a number of new requirements on pension scheme trustees.
“There is certainly momentum building around master trusts,” says Rose Leonard, Head of Corporate Sales and Customer Relationship Management at Zurich. “Pension schemes have to be set up under a trust and many employers have their own individual trusts. But there is a lot of debate about whether master trusts are better than ‘own trust’ arrangements or not. We’ll have our own master trust offering, but we will continue to do business the way employers want to do it and in line with all regulations.”
Zurich’s approach to its master trust offering will be the same as it is to all of the pension schemes the company manages on behalf of clients. “It’s about remaining authentic to the Zurich principle of adding value through active fund management,” she explains. “Over the past 30 years, we have outperformed the average fund manager by 2%. We have averaged 10% per annum over the years, while the average has been about 8%.”
Leonard chooses the 30-year period advisedly, as it is fairly typical of the span of an individual’s membership of a pension scheme.
“When you compound up that 2% outperformance over 30 years, it makes a very significant difference and has a very powerful, positive impact on pension adequacy,” she adds.
More recent performance has been even more impressive. “Over the past ten years, we have significantly outperformed the average, including the past few years when we have seen more volatility in the markets. A good active manager has an opportunity to outperform during periods of volatility.”
Passive fund managers have to take the good with the bad, however. “For example, in the last few years, energy stocks have fallen quite steeply while technology stocks have done very well. An active manager is able to adjust to take that into account while a passive manager can’t do anything about it.”
That commitment to active fund management, combined with a very prudent approach to risk and governance, is at the core of everything Zurich does, she adds. “We also invest in our highly skilled team and robust technology to support our customers. And we are very solvent. Zurich is of the largest insurance companies in the world and is AA-rated by Standard & Poor’s. We are bringing all of that to our master trust; we are sticking to our principles.”
She points out that the great majority of employers who have ‘own trust’ arrangements with Zurich also choose Zurich to act as the trustee for their schemes. “We have a separate trustee company, Zurich Trustee Services, that offers that service. About 85% of new schemes in the recent past have chosen that option. Zurich Trustee Services will be trustee to the master trust as well.”
That option doesn’t suit all companies, of course. “Some bigger companies appreciate the benefit of having their own lay trustees,” Leonard notes. “A lay trustee will have deeper insights into the employer and member needs of a large organisation than an external trustee could ever have. We work with those employers to offer support in the running of their schemes. If they are big enough, they can afford to send employees on courses to gain professional trustee qualifications.”
Indeed, IORP II requires scheme trustees to be professionally qualified. “There is no doubt that many smaller companies will move their schemes into master trust arrangements. IORP II requires trustees to have certain skills and qualifications. If you are a trustee of a large company scheme, the qualification is not insurmountable to get. Large companies tend to have in-house legal expertise, highly qualified financial professionals, and well-resourced HR departments and that helps as well.”
That said, a lot of companies will want to retain their own trust arrangements. These include large technology companies or organisations where employer branding is very important. “Companies get kudos for having their own pension scheme,” Leonard points out. “With schemes of less than about 40 members, that may not be practical. We are also seeing a combination of lay and professional trustee boards as well on some larger schemes.”
What it all boils down to is that there are still options, and a master trust arrangement is by no means the only one. “Zurich is about offering choice to employers. The most important part of a pension scheme is the investment return and whether you will have an adequate pension or not.”
There are some who argue that the additional regulatory requirements imposed by IORP II will create costs that will eat into investment returns in ‘own trust’ schemes. This needn’t be the case, according to Leonard.
“When the provider offers bundled services along with trustee services, there shouldn’t be any real difference in costs. The model where services are segregated adds costs. It works for defined benefit (DB) schemes but not for defined contribution (DC) schemes. DC is a much simpler concept than DB, and people often don’t realise that. Furthermore, a good active investment manager has probably always taken ESG (environmental, social and governance criteria) and responsible investing into consideration and, therefore, will already meet those particular requirements of IORP II.”
The member communication requirements of IORP II are also already met by Zurich’s ‘own trust’ company schemes and the company deploys a suite of powerful online tools to support that. And there is also the personal touch.
“Online tools are very important, but nothing is as powerful as face-to-face meetings with people. Over the past year, we have taken in about six or seven schemes that were previously with other providers. They decided to switch not just for investment performance reasons, but because they had never seen their previous provider. Pensions tend to be a bit more important and complex than the average bank statement. After 30 or 40 years, your pension fund is likely to be more valuable than your house. Nothing can really replace face-to-face meetings when discussing that.”
With no cost implications and the requirements of IORP II already met, employers need not feel compelled to switch to a master trust, she concludes. “Employers who choose Zurich get a genuine choice.”
Zurich Life Assurance plc is regulated by the Central Bank of Ireland.
This article is sponsored by Zurich.
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