In recent months there has been growing interest from government and regulators regarding the regulation or lack of regulation of master trusts.
When you look at the statistics, this isn’t surprising. So far, over 5 million people have been auto enrolled and of these more than 3 million are in a master trust arrangement.
For employers choosing an auto enrolment pension provider, the master trust structure can offer the perfect balance between high quality and low maintenance.
Master trusts enable even small firms 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.
But not all providers are equal and lots of small players with unproven business models are using the allure of the master trust framework to launch speculative propositions to the market.
Having successfully negotiated the auto enrolment staging process probably the last thing an employer wants to contemplate is the idea of the provider they trusted with their staff’s pensions shutting up shop.
But, a recent report on the regulatory framework of DC schemes published by the Pensions Policy Institute (PPI), highlighted some concerns regarding the sustainability of some master trusts and what their demise could mean for employees and employers.
The PPI report points out that setting up a master trust is remarkably easy, with very few regulatory hurdles to overcome. This has led to over 70 master trusts being launched in recent years, with the express intent of profiting from the auto enrolment boom. The PPI predicts that some master trusts that do not achieve the scale needed to become profitable will end up either winding up or merging with other providers.
The PPI warns that this could lead to investments being mismanaged, leading to lower values of pension assets. Worse still, where a master trust winds up, trustees would be required to cover the administration costs from the pension scheme funds.
Employers that opt for a small master trust that subsequently closes could then find themselves with the burden of having to move their employees into another pension scheme, a process they would have to pay for themselves.
The Pensions Regulator has taken some small steps towards trying to head off the risk of master trusts collapsing and leaving employers and members in the lurch. In May 2014 it launched the Master Trust Assurance Framework in association with the Institute of Chartered Accountants in England and Wales, a voluntary benchmarking process designed to enable providers to demonstrate to the market that their scheme is managed to a high standard. At NOW: Pensions we support any initiatives designed to improve standards in master trusts and are firm supporters of the master trust assurance framework.
But we think all pension scheme members deserve to have their retirement savings looked after by a high quality provider. Sadly, this is a very long way from being the case – of the 70 or more master trusts currently enrolling employees into pensions, just four others have completed the master trust assurance framework.
That is why we strongly urge The Pensions Regulator to make the master trust assurance framework compulsory.
Auto enrolment has been successful so far. Requiring all auto enrolment master trusts to meet the highest standards is one way The Pensions Regulator can reduce the risk that scheme collapses and closures don’t tarnish the entire project.