With the introduction of automatic enrolment, increasing longevity, and employees focusing on the full benefit package offered by an employer, rather than just salary, an employer’s pension offering is under the spotlight. However, despite the increased relevance, the difference between types of pension scheme is not always clear. So, what are the key differences between a workplace trust-based pension scheme (“Trust Scheme“) and a workplace contract-based pension scheme (“Contract Scheme“)?
The short answer is that a Trust Scheme is established by a settlor, which is usually an employer, for the benefit of a group of members/employees, whereas a Contract Scheme involves an individual contract between an employee and a pension provider. To truly understand the distinction though, you need to compare the different aspects of these types of schemes and what better way to do that than a comparison table…
| Feature | Trust Scheme | Contract Scheme |
| What documentation governs the scheme? | Scheme trust deed and rules | Provider policy |
| Who administers the scheme? | Trustees | Pension provider (usually an insurance company) |
| Are members’ views represented? | Legislation requires most schemes to have at least one third of trustees nominated by the scheme membership | Providers have to put an independent governance committee in place |
| What duties are owed? | Trustees owe a range of legal duties to the scheme members/beneficiaries, including fiduciary duties | Independent governance committees focus on assessing value for money and act in accordance with Financial Conduct Authority rules (although they have no fiduciary duties) |
| What should you know about the assets? | The trustees legally own the scheme assets (i.e. Trust Scheme assets are legally segregated from the employer’s assets and cannot be called upon in the event of an employer’s insolvency) | The assets are not legally segregated from the provider’s assets (although they are not at risk if the employer goes insolvent) |
| Is there compensation available if the employer/provider goes insolvent? | Compensation may be available from the Pension Protection Fund on an employer’s insolvency and/or from the Financial Services Compensation Scheme on a provider’s insolvency | Compensation may be available from the Financial Services Compensation Scheme on a provider’s insolvency |
| Which body is responsible for the regulatory oversight of the scheme? | The Pensions Regulator | The Financial Conduct Authority (and, to some extent, the Pensions Regulator) |
It is helpful for employers to consider all the characteristics of the different types of pensions when deciding what pension benefits to provide to employees because, as noted above, employees are increasingly considering the pension benefits offered when deciding whether to join/stay with an employer.
For many employers, the higher governance burden of a Trust Scheme is leading them towards selecting a Contract Scheme or a master trust for future pension provision. A master trust is typically a Trust Scheme for multiple employers associated with an insurer or a benefit consultant with professional trustees who take on the key duties.