Before auto enrolment, when any employer setting up a trust-based workplace pension scheme was doing so for the very best of reasons, a light-touch regulatory regime was perfectly appropriate. But occupational pensions regulation is simply not up to the job of protecting the millions of new scheme members spawned by auto enrolment.
Auto enrolment has created a commercial opportunity for pension providers, and too many new players have opted for master trust status because of its virtually non-existent barriers of entry to the market and its lack of standardised reporting requirements. With around 70 master trusts believed to be in operation, the Pensions Minister is right to be concerned about the risks to members. The price-capped auto enrolment market is not big enough to support this many providers. It is likely that at some point at least some of these providers – which operate without the capital adequacy requirements normally expected of financial services operators – will exit the market.
If a small master trust runs out of money, members’ assets may be the only funds available to pay for the costs of wind-up or transfer of the scheme to another provider. And even if members’ assets are protected, significant delays could be experienced in getting funds out, as has already happened when small Self-Invested Personal Pension providers have gone bust.
It is hard to believe that thousands of workers auto enrolled into workplace pensions are currently having money taken from their pay packet, without their permission, and handed to providers that operate with limited asset protection and regulatory controls and no formalised wind-up procedures. No wonder the Department for Work and Pensions has said new regulations will soon be introduced to oversee master trusts.
What can be done to prevent these risks?
We believe stricter regulation should be brought in as a matter of urgency, raising the standard required of providers wanting to enter the market, improving the ongoing monitoring of master trusts and setting clear structures in place for the protection of member assets in the event of scheme wind-up.
Firstly we need to see the voluntary master trust assurance framework, established by the Pensions Regulator (TPR) in association with the Institute of Chartered Accountants of England and Wales (ICAEW) made mandatory. The number of providers to adopt it still stands in single figures – yet if this is the standard TPR believes schemes should meet, why not require all providers to meet it?
Secondly we need improved ongoing monitoring. Under occupational pensions rules reporting requirements fall on the employer and not the master trust itself. This means TPR has no standard reporting requirements for master trust providers, making it difficult for it to effectively ensure consistency of service across the sector. A more prescriptive reporting framework that looks at the master trust’s progress against its business plan and its status in relation to its financial plan is needed.
Finally master trust trustees should be given a duty to maintain an up to date plan for the orderly wind up of their scheme and the release of members’ funds to alternative pension vehicles. Trustees should also be required to confirm that members’ assets are safe in the event of wind up of the master trust, trust sponsor or trust manager.
Done well, the master trust structure is, we believe, the best option for members and employers – sharing the cost of high quality governance structures across multiple employers, and accessing excellent investment management and administration services at low cost. But without tighter regulation, the master trust concept, that answers so many of the needs of employers and scheme members, risks being badly damaged if and when a small player goes to the wall. Standards need to be raised as a matter of urgency to ensure the only master trusts built on solid foundations can accept auto enrolment business.