The very name “master trust” conjures up the sound of safety. Dig deeper and the feeling of confidence increases. It’s a collective of several employers who have grouped together, bringing economies of scale and safety in numbers.
Plus a governance framework with trustees providing independent oversight and looking after the members’ interests.
So why the worry?
The answer seems to be that we have gone from a position of under-supply to one of over-supply. When auto enrolment was put on the statute book there was a worry that there would not be enough schemes willing to serve millions of low earning employees with very small contributions.
But, competition has been vibrant.
There are approximately 100 master trusts of which 59 are being used for auto enrolment. The reality is far more entities have stepped up to the plate than are either needed or capable of being supported by automatic enrolment. Factor in the low contribution rates and the charge cap and many of these master trusts will be bringing down the shutters before long.
We have no wish to force players to close or to prevent further new entrants coming to market.
But we are concerned that some venturing into the master trust market are putting members’ money at risk in doing so. That is fundamentally wrong. When they set up in business it should have been on the basis that they were putting their own capital at risk if they couldn’t make things work.
Fortunately it’s not too late to shut the stable door.
We expect that the forthcoming Pensions Bill will contain capital adequacy provisions, requiring all master trusts to hold enough capital, or firm guarantees from their sponsors, to cover the costs of an orderly wind-up without having to dip into members’ accounts.
That way, any master trust whose business plan has not worked out will be able to conduct a proper reconciliation, find new homes for their members and transfer the full value of accounts to another scheme.
However, there’s not much point having a parachute in the aircraft locker if the pilots don’t have the skills and knowledge to realise when their plane is getting into trouble. So we also expect measures to introduce a “fit and proper” test to those running the scheme. It should apply to both the day-to-day executive management of the scheme and the trustees that govern it.
It has been suggested that master trusts should pay a levy to insure savers against the risk of a master trust failing in a disorderly manner. While on the face of it this might seem like a sensible suggestion, we are worried that a compensation scheme will undermine confidence in pensions as savers believe that master trusts are safe but a compensation scheme voices the prospect of failure.
A levy also injects moral hazard into the market. Those taking unsustainable commercial risks would have their cost of market exit subsidised by the prudent. This risks encouraging the sort of commercial behaviours we need to drive out of the market.
We think it is better to have tougher regulation and an agreement between providers to absorb weak schemes within stronger schemes with minimal fuss.
In the rush for new regulation we must not forget the underlying strength of the master trust structure – collective schemes run by trustees acting in the members’ interests. The regulation should seek to build on and strengthen that trustee system, not create something that caters for the trustees to fail.
Adrian Boulding is director of policy at Now: Pensions