Morten Nilsson, CEO NOW: Pensions
Trust and pensions are two words that have not always sat comfortably next to each other. Whether it’s the closure of final salary schemes, “dog” funds, the Maxwell scandal or Equitable Life, pensions have often hit the headlines for all the wrong reasons.
With eleven million people set to be enrolled into workplace pensions as a result of auto enrolment, a renewed focus on raising standards in the pensions industry has rightly ensued. Against this backdrop it’s perhaps no surprise that master trusts have become more prevalent.
The master trust structure enables even small employers to benefit from high standards of governance as the independent board of trustees that oversees the running of the scheme has a statutory duty to ensure that it is being run in the best interests of its members at all times. This means members have the comfort of knowing there is an independent body overseeing decisions on crucial issues such as charges, investment strategy and administration. Of equal importance is the fact that within master trusts, all members are treated equally regardless of whether they are active or deferred members.
A contract-based scheme on the other hand is essentially a grouping together of individual policies, it is not one legal entity. They do not have boards of trustees, and while insurance companies have a duty to treat their customers fairly, they also have a responsibility to maximise profits for their shareholders by making as much money out of schemes as they possibly can. Once members leave their employer, they often lose their active member discount and in many cases end up paying higher charges with their interests all but forgotten about.
The government and regulators all agree that master trusts have the potential to play a significant and beneficial role in the auto enrolment market, raising standards and increasing choice.
But, not all master trusts are the same, and this may not be immediately apparent to employers when choosing a scheme.
The Pensions Regulator has stated that 44 master trusts set up in the UK over the past two years and a large proportion of these have been established by insurance companies.
Many of the trustee boards of master trusts established by insurance companies have representation from the insurer parent. This raises questions over conflicts of interest. In reality, how independent is the board of trustees? How likely is it that these trusts will change the administrator or fund manager other than to other of the insurance company even where a change would be in the best interests of members? In reality what action can trustees realistically take if they disagree with the insurer apart from step down?
Another area of concern is the low barriers to entry in the master trust world. When we came to the UK I was astounded by how easy it was to establish a master trust. In contrast, insurance firms that provide contract based schemes are subject to prudential regulation by the PRA and are required to maintain capital liquidity to deal with operational risks.
With master trusts, there is no licence or regulatory authorisation required and no rules around capital adequacy. In other countries, the regulation around master trusts is much tighter. This needs to be urgently addressed as without tighter controls, there is a very real risk of a proliferation of sub-standard master trusts.
The Pensions Regular and the Institute of Chartered Accounts in England and Wales have together published a draft assurance framework with the aim of driving up standards in master trusts. But, this framework is voluntary and while an assurance report might be of some comfort to employers when it comes to selecting a master trust, it doesn’t address the issue of barriers to entry.
At its core, the master trust model is a robust one and, if run well, can provide employers with a low cost, high quality pension arrangement. But, the good reputation of master trusts will easily be undermined if barriers to entry aren’t raised. If the numbers of master trusts operating in the UK market continue to swell, it’s going to become increasingly difficult for The Pensions Regulator to keep a handle on them. Not only that but it’ll become more difficult for employers to sort the wheat from the chaff.
Master trusts should be encouraged as in many ways they offer an ideal solution for the needs of a multitude of employers in the auto enrolment environment. But, more needs to be done to safeguard standards to prevent employers buying into a false promise.