Is tPR right to be worried about master trusts?

Sustainability of master trusts is one of the Pensions Regulator’s (tPR) top ten priorities – and we know the Regulator is undertaking a review of the business of some master trust founders in order to assess their longevity.

The principal concerns are:

- What happens if a master trust fails? Just how significant will the challenges be?

- Pension scammers may be among those establishing master trusts. (Indeed, there is already some evidence of this being the case.)

- Although master trusts are competing with private insurers in the workplace pensions market, they are currently not subject to the same solvency requirements.

Add to these the seemingly low barriers to setting up a master trust and the apparent ease in obtaining HMRC approval, and tPR’s concern is understandable.

Is big beautiful?

The proliferation of master trusts (thought to now be well in excess of 100) has been contrary to original expectations. Driven by auto enrolment, numerous new players have entered the market and established mastertrust schemes. This is surprising. If done properly, set up costs are actually quite high and a return on investment for the founder looks some way off into the future.

It would be fair to say the Pensions Regulator has on a number of occasions stated a preference for ‘big is beautiful’. At the larger end, the economies of scale make perfect sense as they enable member costs to come down. Originally, tPR anticipated there being around half a dozen master trusts that could bring scale and some meaningful prospect of fund growth. Larger master trusts could also provide a return to the founder and fund excellent governance and systems over the long term to make it work for the benefit of all.

So what’s the real issue?

The Regulator is concerned about the answers to a couple of questions that arise if a master trust is forced to close (as surely some will in time):

• how will member pots be protected?
• who will meet the costs of wind-up?

Without a solvent sponsor, wind up costs will inevitably fall on the members. There appears to be a gap in the legislation that needs plugging.

Is there an answer?

Part of the answer has been in the development of the Master Trust Assurance Framework (MAF) by the ICAEW in partnership with the Regulator. Voluntary MAF accreditation will assess whether the master trust has adopted standards of governance and administration that meet the defined contribution (DC) code and regulatory guidance.

Currently nine schemes have obtained MAF and secured the right to be named on tPR’s website. Others are working towards obtaining accreditation, which seems an inevitable requirement to gain credibility in the market place. In the absence of further regulations to beef up tPR’s powers, MAF is the Regulator’s main way of signalling to the market and employers that a master trust is ‘fit for purpose’.

In terms of further regulation of master trusts (which the Treasury and DWP are looking into), it is a case of watch this space. With the spotlight on the pensions market and the need to protect members and obtain ‘value for members’, we would not be surprised to see a tightening of governance requirements for master trusts and possibly some form of protection for members.

Indeed, it is likely some form of master trust regulation will be announced in the pensions bill to be included in the Queen’s speech this week. As the trustee and chair to a master trust, we welcome this development but only time will tell whether such regulation is effective in preventing the costs of failure of a master trust from being borne by the members.

 

 

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