Shining a light on mastertrusts

The government and regulators all agree that multi-employer trusts have a significant and beneficial role in the auto enrolment market.

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.

But, data from The Pensions Regulator (TPR) published in January 2014 revealed an 11% increase in the number of mastertrusts over the past year increasing from 44 to 49.

Against this rapid growth, pressure is building on TPR to take action to safeguard standards.

The proposed solution, is that mastertrusts obtain independent assurance on an annual basis by the ICAEW. By achieving this accreditation, it is hoped that employers will be able to better assess the quality of different mastertrusts and this, in turn, should help to drive up standards.

But, this framework is voluntary so while reputable players will happily comply, there is a danger that those who it is intended to target will simply turn a blind eye. It also does nothing to address barriers to entry which are far too low.

While TPR hope that those who don’t obtain the assurance will be shunned by employers, the reality is that without significant effort to raise awareness of this differentiator amongst employers, the value of it will be entirely lost.

Research we conducted in March with 450 SMEs revealed that nearly half are yet to give any thought to how they are going to find a provider for auto enrolment. With a large proportion destined to leave it until the last minute, it’s unlikely that many will have the time or inclination to undertake a thorough market review before settling on a provider.

But, choice of provider can have significant impact on savers’ pension pots and employers have a critical role to play in ensuring their workforce get value for money from their pension savings.

However, assessing value for money is no easy task.

A report from the Pensions Institute published at the beginning of the year, VfM: Assessing value for money in defined contribution default funds defined, for the first time, the characteristics of a value for money pension scheme.

  1. Scheme charges in the region of 0.5% a year for the accumulation period.
  2. A well-designed multi-asset default fund with a glide path that is subject to regular modelling scrutiny in relation to the member income replacement ratio (RR) and the downside risks.
  3. Expert independent governance fully aligned with all members’ interests, including both active and deferred, through accumulation into decumulation.
  4. Governance requires the expertise to assess Value for Money in relation to design and charges and should have demonstrable power to manage all conflicts in the members’ best interests.
  5. Effective member communications that focus on improving the outcome, e.g. paying higher contributions, working longer, and/or delaying the annuity purchase date.
  6. An efficient consolidation system that helps members to transfer older DC pots to the new scheme, where these are held in poorly diversified funds with higher charges.

TPR is entirely right to shine a light on mastertrusts but safeguarding standards and ensuring value for money will take more than a voluntary audit framework.

Government and regulators need to work together to establish proper regulation that would create barriers to entry and help drive the less durable mastertrusts out of the market while at the same time continuing with initiatives that will help ensure that the schemes workers are enrolled into deliver on their promises.

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Martin Woods,