Contract and trust based pensions: key differences advisers need to know
Helping advisers guide employers towards the right governance model
Key points
- Governance differs fundamentally — contract‑based schemes are provider‑run, while trust‑based schemes are overseen by trustees.
- Investment structures and fund choice vary, influencing member outcomes and governance requirements.
- Employer responsibility differs significantly — from lighter touch to active governance involvement.
- Default fund charge caps apply to both, but their tax mechanisms are different.
Contract‑ and trust‑based pensions differ in governance, responsibility and delivery. To help you support informed employer decisions, we've broken down the key differences advisers are most often asked about.
Set up and governance
The differences in the structure of contract- and trust-based pensions have implications for employer involvement, risk and governance:
Contract-based pension
- The employer sets up the Group Personal Pension scheme, with the provider responsible for day‑to‑day operation.
- Members hold individual contracts with a pension provider, typically an insurer such as Aviva.
- Regulated by the Financial Conduct Authority (FCA).
Trust-based pension
- The employer establishes the scheme, which is then governed by a trustee board.
- Trustees carry legal responsibility for scheme management and member interests.
- Regulated by The Pensions Regulator (TPR).
Making and overseeing investment choices
Auto-enrolment regulations give employers responsibility for selecting a default fund for their employees. Providers/ trustees support employers with this in different ways.
Contract-based pension
- Investment options are set by the provider’s investment team.
- Schemes typically offer a wider range of funds.
Trust-based pension
- Trustees, often supported by advisers, select and monitor investments.
- Fund ranges are often more tailored, though typically narrower.
Employer responsibilities and communications
Employer responsibility increases significantly under trust‑based arrangements.
In contract‑based schemes, providers like Aviva handle most administration.
Contract-based pension
- Reduced administrative burden for employers.
- The provider handles member communications.
- Communications must meet FCA standards — clear, fair and not misleading.
- An Independent Governance Committee (IGC) assesses value for money.
Trust-based pension
- Employers carry greater governance responsibility.
- Outside a master trust, employers must appoint trustees and support legal and regulatory compliance.
- Trustees manage communications and scheme operation under TPR standards.
- Trustees are expected to assess value for money against market alternatives.
Tax relief and charging structures
Contract-based pension
- Typically operates using relief at source.
- Basic‑rate relief is added automatically; higher‑rate taxpayers reclaim additional relief via self‑assessment.
Trust-based pension
- Typically uses net pay, with tax relief applied via payroll.
Both scheme types are subject to charge caps on default funds used for auto‑enrolment.
Which scheme is right for employer clients?
Contract‑based schemes often suit employers seeking simplicity and reduced governance responsibility. Trust‑based schemes are more common among larger employers or those wanting greater control. Advisers play a critical role in helping employers assess which structure best fits their objectives and capacity.
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