EMPLOYER-SPONSORED SCHEME OR MASTER TRUST SCHEME? : The Considerations for Choosing the Right Pension Governance Model.

 

INTRODUCTION

When an employer decides how to arrange the mandatory second-tier pension scheme for its workers, the choice between an Employer-Sponsored Scheme (ESS) and a Master Trust Scheme (MTS) may initially appear to be mainly administrative. Both structures are recognised under Ghana’s pension framework and both are intended to receive, invest and preserve pension contributions for the benefit of workers. It may therefore seem that the decision is simply about which pension provider or arrangement to use. That would underestimate the significance of the choice.

Choosing between an ESS and an MTS is not merely a decision about who will administer pension contributions. It is also a decision about who will govern members’ retirement wealth, how much control the employer and members will have over that governance, what it will cost, and who will bear the responsibility for ensuring that the Scheme operates effectively.

The National Pensions Act, 2008 (Act 766) recognises the structural distinction between the two models. An ESS is essentially a single-employer arrangement operated by its own Board of Trustees, while an MTS is a multiple-employer arrangement operated through an approved Corporate Trustee.

That structural difference creates two distinct governance propositions. Under an MTS, the employer and its workers participate in an established professional pension structure whose systems, expertise and infrastructure are shared across multiple employers and members. Under an ESS, governance is brought closer to the employer and its workers, giving the Scheme greater control over how its affairs are organised and its resources applied.

But greater control is not an unqualified advantage. Where an ESS is sufficiently large and competently governed, it may operate at a lower cost and allow more economic value to remain within the Scheme for the benefit of members. That potential benefit—the governance dividend—comes with a corresponding price: greater governance responsibility and greater exposure to governance risk.

This article therefore goes beyond a simple comparison of two pension structures. It asks a more fundamental question: what do an employer and its workers gain—and what responsibilities, costs and risks do they assume—under each governance model? It examines whether the shared professional structure of a Master Trust provides sufficient value for the fees members bear, and whether the greater control available under an Employer-Sponsored Scheme can be converted into better value for members without creating unacceptable governance risk.

Ultimately, the better structure is the one that leaves members better protected and better positioned for retirement.

GOVERNANCE STRUCTURE, SCALE AND COST

An MTS operates through a Corporate Trustee with professional staff, systems, technology, compliance processes, administration and other infrastructure already in place. Because these resources support multiple employers and members, their cost is spread across a larger institutional platform. This can make an MTS particularly attractive to an employer that lacks the scale or institutional capacity to support its own pension governance efficiently.

An ESS operates differently. Its Board exists specifically to govern the pension interests of one employer and its members. Fund management and custody are outsourced to approved external service providers as required by law, while pension administration may either be undertaken in-house or outsourced to an approved Corporate Trustee. In either case, the Board must retain sufficient capacity to supervise service providers, understand the Scheme’s risks and govern effectively.

An ESS should not, however, attempt to recreate the institutional structure of a Corporate Trustee. A Corporate Trustee requires substantial permanent infrastructure because it operates a pensions business across multiple employers and schemes. An ESS has a narrower purpose: to govern one Scheme efficiently for one employer and its members. Its governance arrangements should therefore be proportionate to that purpose.

This does not mean weak governance or pursuing the lowest possible cost. The Scheme must still have the competence, controls, technology and professional support required to discharge its responsibilities properly. The objective is efficient governance, not minimal governance.

A large employer may already possess capabilities that make an ESS considerably more economical. A bank, for example, may have treasury expertise, risk-management systems, internal controls, compliance structures, technology and physical infrastructure capable of supporting effective pension governance without creating a parallel Corporate Trustee-style bureaucracy or maintaining separate premises.

Where such institutional capacity can appropriately support the Scheme, the resulting efficiencies allow a greater proportion of members’ pension assets to remain invested. At the same time, the ESS must retain its distinct fiduciary character. It must not simply become another department of the sponsoring employer. Operational support may be shared; fiduciary judgement remains with the Board of Trustees.

Scale is therefore important. For a smaller fund, the cost of maintaining trusteeship, administration, compliance and effective oversight may be high relative to the assets being managed. A larger Scheme with substantial membership, regular contribution flows and significant assets may be able to spread necessary governance costs over a larger asset base and negotiate more favourable terms with service providers.

The law does not prescribe a particular Asset Under Management (AUM) threshold at which an ESS automatically becomes preferable to an MTS. The practical test is whether the Scheme has sufficient scale and institutional capacity to support competent governance at a materially lower cost without weakening administration, oversight or member protection.

A Master Trust may therefore be more suitable where an employer benefits from sharing the cost of professional governance, systems and administration with others, or where it does not already possess the institutional capacity to support an ESS effectively. An ESS becomes more attractive where the Scheme can govern itself effectively without reproducing the cost structure of a Corporate Trustee. But size alone does not make an ESS worthwhile. Scale must translate into economic value for members.

COST, OWNERSHIP AND THE GOVERNANCE DIVIDEND

Pension fees may appear modest when expressed as a percentage of Assets Under Management, but their effect accumulates over time. A recurring charge does not merely reduce the value of the fund in the year in which it is incurred; it also reduces the capital on which future investment returns would otherwise have been earned. The relevant question is therefore not simply what a Scheme costs today, but how much retirement wealth those costs prevent members from accumulating over time.

Under the applicable NPRA fee structure, the maximum charges for trusteeship, fund management and custody are 1.33%, 0.56% and 0.28% of AUM respectively. The word maximum is important. It represents a regulatory ceiling, not an amount that an ESS must automatically charge its members.

A Corporate Trustee operating a Master Trust is a commercial pension institution. Its trustee fee supports the professional staff, administration systems, technology, compliance arrangements, premises, equipment and other infrastructure required to operate its business and serve multiple employers and schemes. Master Trust Corporate Trustees understandably charge the maximum trustee fee of 1.33% of AUM.

An ESS presents a different economic proposition. It exists for one employer and its members and, where it has sufficient scale and institutional capacity, should not need to reproduce the full commercial infrastructure of a Corporate Trustee. An Employer-Sponsored Scheme should therefore not impose the same trusteeship cost on members as a Master Trust Scheme.

This creates an important opportunity for a sufficiently large and efficiently governed ESS. If the Scheme is capable of meeting the Fund Manager and Custodian fees from within the 1.33% governance envelope, those two professional services would account for 0.84% of AUM, leaving 0.49% of AUM for trusteeship, administration and other legitimate governance costs.

Compared with a structure in which the 1.33% trustee fee, 0.56% fund management fee and 0.28% custody fee are charged separately, this would preserve 0.84% of AUM for members. For a large Scheme, that difference is economically significant because the amount retained remains invested and continues to contribute to the growth of members’ retirement wealth.

The remaining 0.49% should not be treated as an automatic entitlement of the trustees. Trustees should be able to justify to members how much is reasonably required for trusteeship, administration and other legitimate governance expenditure, and how those resources are being applied. Trustee remuneration and related governance expenditure should therefore be reasonable, transparently disclosed and accountable to members, and, as a matter of good governance, subjected to member approval within the applicable NPRA limits.

The potential economic benefit becomes even greater where the Scheme can operate below the full 1.33% governance envelope. Suppose, purely for illustration, that a sufficiently large and efficiently governed ESS determines that 0.33% of AUM is sufficient to meet legitimate trustee-related governance and administrative costs. Compared with an MTS charging 1.33% for trusteeship, 1 percentage point of AUM remains within the Scheme. For a Scheme with GHS1 billion in AUM, that difference represents GHS10 million in one year, before considering the additional investment returns that may subsequently be earned on that amount.

This is the governance dividend of an Employer-Sponsored Scheme: the additional economic value retained for members where the Scheme is sufficiently large and competent to govern itself effectively at a lower cost than the MTS alternative. The benefit is not merely the immediate fee saved. It is pension wealth that remains invested and continues to compound for members.

There is also an important ownership distinction between the two governance models. Under an MTS, the trustee fee paid to the Corporate Trustee becomes commercial income of that Corporate Trustee. Where that income is used to acquire offices, computers, vehicles, technology systems or other business infrastructure, those assets belong to the Corporate Trustee as a corporate body. Members pay for access to the professional infrastructure and services of the Corporate Trustee; they do not acquire an ownership interest in the assets of that business.

An ESS is different. Where Scheme resources are lawfully used to acquire physical or operational assets for legitimate Scheme purposes, those assets form part of the Scheme’s trust-property structure. They are Scheme assets, not the personal property of the trustees or assets of the sponsoring employer, and must be held and applied for the benefit and purposes of the Scheme.

The distinction is therefore not merely about who pays for an asset, but in whose legal and economic estate the resulting value resides. Under an MTS, value created from the Corporate Trustee’s commercial income remains with the Corporate Trustee. Under an ESS, value lawfully created from Scheme resources remains within the Scheme for the benefit of members.

But the governance dividend does not arise without corresponding governance risk. By retaining governance within the Scheme rather than purchasing the full institutional infrastructure of a Corporate Trustee, an ESS assumes greater responsibility for ensuring that trustees are competent, independent, accountable and properly supported. Lower cost is therefore the potential reward; greater governance responsibility is the price.

The objective must never be cheap governance. An ESS that reduces costs by underinvesting in administration, controls, technology, trustee competence or professional support may ultimately destroy more value than it saves. The governance dividend exists only where lower cost is achieved without weakening the quality of governance or member protection.

The relevant comparison is therefore not simply the gross investment return reported under an ESS or an MTS. It is the net retirement value retained by members after investment performance and Scheme-level costs, supported by governance capable of protecting and sustaining that value.

Where an ESS cannot demonstrate a tangible economic advantage for members, the case for retaining the additional governance responsibility in-house becomes significantly weaker.

TRUSTEE COMPETENCE, INDEPENDENCE AND GOVERNANCE RISK

One of the principal attractions of an ESS is greater control over the governance of members’ retirement wealth. But control without competence is not an advantage; it is governance risk.

Act 766 requires trustees to understand the Scheme’s governing documents and possess sufficient knowledge of pensions, trust law, funding and investment to perform their duties properly. A Corporate Trustee institutionalises expertise through professional staff, systems, procedures and accumulated experience. An ESS must deliberately build and maintain the competence required to govern effectively.

Trustees are not expected to perform every specialist function themselves. Fund management and custody are undertaken by approved external service providers, while pension administration may be undertaken in-house or outsourced. But fiduciary accountability remains with the Board of Trustees.

Effective trusteeship therefore requires trustees who can understand reports, assess risks, question performance, challenge service providers and recognise when specialist advice is required. Training is an activity; competence is an outcome.

Competence, however, is only part of the governance challenge. Trustees must also be capable of acting independently where the interests of the Scheme and those of the sponsoring employer diverge.

This becomes particularly important where an employer delays or fails to remit mandatory pension contributions. L.I. 1990 requires an approved trustee to notify the Authority where a participating employer fails to pay mandatory contributions in full and provides for the applicable statutory surcharge on arrears. Trustees also have responsibilities relating to recovery and the verification of arrears and surcharges.

The legal duty may be the same under both models, but the practical conditions under which that duty is exercised are not. A Corporate Trustee operating an MTS is institutionally separate from the participating employer and is generally better positioned to pursue contribution arrears at arm’s length. Under an in-house ESS, however, some trustees may themselves be employees of the sponsoring employer.

The practical question is unavoidable: Will employee-trustees be able to demand payment of arrears, statutory surcharges and regulatory escalation from the very employer on whom they depend for their employment?

A trustee may be independent in fiduciary duty while remaining dependent in employment. The concern is not whether employee-trustees possess the legal authority to act, but whether they can exercise that authority effectively when doing so places them in conflict with their employer.

The real test of trusteeship is therefore not how trustees act when the interests of the employer and Scheme coincide, but whether they can act independently when those interests diverge.

Accountability is equally important. Member representation provides a voice in Scheme governance, but representation alone does not guarantee effective oversight. Members should have appropriate transparency over governance costs, trustee remuneration, service-provider performance and the application of Scheme resources. Trustee remuneration should therefore be reasonable, transparent and accountable.

There is also a longer-term issue. Pension schemes outlive individual trustees, CEOs and management teams. An ESS that functions effectively only because of the competence or commitment of particular individuals is not sufficiently robust. Its systems, controls, institutional knowledge and governance processes must survive succession and organisational change. An ESS must therefore be institutionally capable, not merely presently capable.

The governance bargain is complete only where four conditions are present: competence to govern, independence to act, accountability to members and continuity of institutional capability. Without them, the same structure capable of creating a governance dividend may instead expose members to governance risks greater than the economic value saved.

FLEXIBILITY, RESPONSIVENESS AND MEMBER ALIGNMENT

Beyond cost and governance, the two models may differ in how closely pension services respond to members’ needs.

An ESS serves a defined workforce and may therefore be better positioned to tailor member education, communication, retirement planning and service standards to that workforce. Trustees are closer to the members they serve and may identify recurring concerns and service deficiencies more quickly. Its principal advantage is proximity and customisation.

A well-run MTS can achieve responsiveness differently. A Corporate Trustee may offer sophisticated digital platforms, established administrative processes, experienced relationship management and systems developed across a much broader membership base. Its strength lies in professional systems, accumulated experience and institutional consistency.

The distinction is therefore not that one model is responsive and the other is not. An ESS may achieve responsiveness through proximity and customisation; an MTS may achieve it through professional systems and institutional capacity. For an ESS, however, greater control should result in greater responsiveness, not merely reproduce the same service problems under a different governance structure.

Proximity also has limits. Closeness to the sponsoring employer must not become improper interference with investment, administration or other fiduciary decisions. Trustees remain responsible for decisions taken in the exercise of their duties. Responsiveness must not become interference, and flexibility must not replace fiduciary judgement. The value of greater control is therefore demonstrated by better service, stronger member engagement and improved retirement outcomes, while preserving the independence of the trustees.

CHOOSING THE APPROPRIATE MODEL: A PRACTICAL DECISION FRAMEWORK

The choice between an ESS and an MTS should not be driven by prestige, institutional preference or simply the desire to have an organisation’s own pension scheme. It should be based on which structure is more likely to deliver sound governance, lower net cost, institutional resilience and long-term value for members.

The decision can be tested through six practical questions.

1. Is the Scheme large enough to support its own governance efficiently?

An ESS becomes attractive where the Scheme has sufficient membership, contribution flows and assets to support competent governance at a materially lower cost. A smaller employer may obtain better value from an MTS because the cost of professional governance, systems and administration is shared across many employers and members.

But size alone is not enough. Scale must produce economic value for members, not merely make an in-house Scheme possible.

2. Does the employer already possess institutional capacity that can support an ESS?

An employer with established risk-management systems, internal controls, compliance structures, technology, professional expertise and physical infrastructure may be better positioned to operate an ESS efficiently without building a parallel Corporate Trustee-style institution.

Where that capacity already exists and can be appropriately leveraged, an ESS may achieve effective governance at a lower cost. Where it does not exist, or where creating and maintaining it would require substantial new staffing, systems, premises or other fixed infrastructure, an MTS may be the more appropriate option. In that circumstance, the employer and its workers benefit from joining an established professional pension structure rather than incurring the cost and governance risk of building those capabilities independently.

3. What are members actually receiving for the cost of governance?

An Employer-Sponsored Scheme should deliver a clear cost advantage over a Master Trust Scheme if members are to assume the additional governance responsibility associated with operating the Scheme in-house.

The relevant question is not simply how much the Scheme is permitted to charge, but how much it actually needs to govern effectively and how much value ultimately remains invested for members. Trustees should therefore be able to justify governance costs, remuneration and related expenditure in terms of the value delivered to members.

The test is whether the ESS produces a measurable governance dividend without weakening governance quality or member protection. Where it cannot demonstrate such an advantage, the case for retaining the additional governance responsibility in-house becomes weaker, and an MTS may provide better value through its established professional structure and shared governance costs.

4. Are the trustees competent and sufficiently independent?

An ESS requires a Board capable of understanding the Scheme, supervising service providers, assessing risk and challenging poor performance. The trustees must also be able to act independently where the interests of the Scheme and those of the sponsoring employer diverge.

The practical test is demanding: Would the trustees be able to resist improper employer interference and pursue contribution arrears, statutory surcharges and regulatory escalation against the employer where necessary? Where that independence is doubtful, the arm’s-length institutional position of a Corporate Trustee may offer stronger protection.

5. Are the governance arrangements accountable and responsive to members?

Greater proximity to governance should produce greater accountability and better service, not merely greater authority. Members should have meaningful representation and appropriate transparency over governance costs, trustee remuneration, service-provider performance and the use of Scheme resources. The structure should also support effective member education, communication, retirement planning and service delivery.

An ESS may achieve responsiveness through proximity and customisation, while an MTS may achieve it through professional systems and institutional capacity. The test is whether the chosen model produces better member outcomes in practice.

6. Can the governance model remain effective over time?

Pension governance must survive changes in management, trusteeship and organisational leadership.

An ESS should therefore not depend excessively on the competence or commitment of a small number of current office-holders. Its systems, controls, institutional knowledge and governance processes must be sufficiently durable to withstand succession and organisational change. An ESS must be institutionally capable, not merely presently capable.

The central decision can therefore be reduced to one question: Does the employer have sufficient scale, institutional capacity and governance competence to convert the greater control of an Employer-Sponsored Scheme into a sustainable governance dividend for members without exposing them to disproportionate governance risk?

Where the answer is yes, an ESS presents a strong governance and economic case. Where the answer is no, an MTS provides better value through shared costs, professional expertise, established systems and arm’s-length governance.

CONCLUSION

The choice between an Employer-Sponsored Scheme and a Master Trust Scheme should ultimately be judged by one standard: which structure best protects, preserves and grows members’ retirement wealth.

An ESS can offer a compelling economic and governance proposition where the Scheme has sufficient scale, institutional capacity and a competent and independent Board. In those circumstances, greater control can be converted into lower governance costs and greater retention of members’ pension wealth—the governance dividend.

But that dividend comes with greater governance responsibility. An ESS must therefore be capable of maintaining the competence, independence, accountability, controls and institutional continuity necessary to protect members. Greater control creates value only when the Scheme can carry the responsibility that accompanies it.

An MTS offers a different proposition: established professional infrastructure, shared costs, institutional expertise and arm’s-length governance. It may therefore be the more appropriate model where the employer lacks the scale or institutional capacity to support an ESS effectively, or where operating an ESS would not produce a sufficient economic advantage for members.

Neither model is inherently superior. The appropriate model is ultimately the one that offers the best balance of cost, control, competence, independence, accountability, continuity and member value.

Ultimately, the better governance model is the one that allows the greatest possible share of members’ pension wealth to remain prudently invested, properly governed and ultimately available to provide retirement security.